Post date: 03/08/2018 - 17:54
Heineken Performance Trends 2013-2017 - results dataIn mid-February, Heineken released its results for 2017. The brewer posted a 5% increase in sales for the 12 months, on a 3% lift in volumes. Here, drinks industry commentator Richard Siddle considers Heineken's performance over the last five years.
In mid-February, Heineken released its results for 2017. The brewer posted a 5% increase in sales for the 12 months, on a 3% lift in volumes. Here, drinks industry commentator Richard Siddle considers Heineken's performance over the last five years.
Despite what it still sees as "volatility and uncertainty" in both the global economy and international beer market, Heineken continues to find a way through those choppy waters with a 5% rise in sales to EUR21.9bn (US$36.8bn) and a 9% rise in organic net profits to EUR2.2bn for 2017. This year's solid trading performance is the latest in a series of results that has long made Heineken one of the safest long-term bets in the brewing world.
What is particularly impressive is that all its reporting regions around the world have again returned strong growth figures, with Africa, Middle East & Eastern Europe leading the way with 13.5% jump in sales.
Sales across its emerging markets now account for 60% of total group sales, up from 57% in 2016. With brewing operations in 70 countries, the group has announced further expansion plans to increase production in Mexico, Cambodia, Vietnam, Ethiopia, Haiti and the Ivory Coast.
It's certainly a time for chief executive Jean-François van Boxmeer and his team to reflect on a job well done, not just for the last 12 months, but, as this report shows, the last four years and more.
The FY13 and FY17 comparisons show that sales have gone from EUR19.26bn to EUR21.9bn, volumes are up from 181.3m hectolitres in 2014 to 218m h/l, and operating profits have moved from EUR2.78 in FY14 to EUR3.8bn in FY17.
For all its size, scale and international power, Heineken, is still a part-family-owned, independent brewing business. In a world dominated by super-tanker-sized brewing giants, this places the Dutch company in a category very much of its own.
It might have over 300 global and regional brands in its portfolio but, in Van Boxmeeer, it's still run by a former brewing operations manager.
This is best encapsulated by the colourful, charismatic founder of US craft beer business the Lagunitas Brewing Co, Tony Magee, who says of all the global beer giants, Heineken was the only one he would have envisaged selling his business to. At heart, he says, they remain true family brewers. "There are many great international brewers but there is only one Heineken," wrote Magee when he initially sold Heineken 50% of the business in 2015 (before handing over the other half in May last year). "The other global 'brewers' are essentially holding companies, bankers by any measure. Heineken is still a brewer first."
Admittedly, Heineken is a brewer that happens to have some 170 breweries around the world. Yet, the size of these facilities varies, from breweries producing over 13m barrels a year, down to just 20,000 barrels.
Anheuser-Busch Inbev may still be the preferred 'Buy' stock of 65% of drinks analysts, compared to 50% for Heineken (Bloomberg), but it's the giant brewer that craft breweries most admire.
Key brand development
Heineken has a strong track record in developing category-changing brands. Over the last four years, the group has launched products designed to help re-position Heineken as a brewer of quality that makes discerning craft beer brands in their own right: Products ideally placed to work within a craft and speciality category that contributed to Heineken's double-digit volume growth in 2017.
There have been launches of brands like H41, introduced in 2016, to bring new interest to the stalling ales category where the focus was on creating a stronger ale using a yeast strain from Patagonia, to create a 5.3% abv beer initially for the Italian market.
Then, last year, there was Maltsmith's, a craft-style beer range made from a pilot brewery in Edinburgh. These beers have been introduced to appeal directly to what Heineken estimates are the 13m drinkers who are "beer curious" but are currently put off by the intimidating choice in craft beer. Here, it is the style of beer, be it a Pils or an IPA, that becomes the brand name, similar to how variety-led wines, like Sauvignon Blanc and Chardonnay, have become so popular within the wine category.
Low and no-alcohol launches
Perhaps most significant to its next four years of trading are the inroads Heineken has made over the last couple of years into the burgeoning low- and no-alcohol beer categories. The results for 2017 revealed its initial brands in this area now account for 12.5m h/l litres, with low single-digit-growth, up from 12.4 m h/l in 2016.
These include Heineken Light, its 3.3% abv beer with lower calories and carbs that was first introduced in Australia in 2016. In 2017, the brand achieved high single-digit growth with launches in Mexico, Indonesia, Poland, Greece and Switzerland.
This was followed by Heineken 0.0 in May 2017 which has now been rolled out into 16 countries. The brand plays a big part in Heineken's sponsorship of Formula 1 and its global 'When you drive, never drink' campaign.
Heineken continues to transform itself from what was traditionally a European-focused brewer into one of the world's biggest and most influential players. During his 12 years in charge, chief executive Jean-François van Boxmeer has led the company through 65 acquisitions totalling US$30bn, many of them in emerging markets.
The group's emerging markets footprint now accounts for 55% of total operating profits. Heineken looks set to continue its strategy of running its own operations and joint ventures with local players.
The performance of those emerging markets outperformed the group in 2017, with a 9.8% rise in sales and an 8% increase in operating profits. Vietnam and Mexico now account for more than a quarter of the group's bottom line.
The last four years have seen Heineken increase its mix of premium brands and, thanks to its growing international business, introduce more world beers to new markets. According to Bernstein Research, the company is thought to be responsible for 10% of the world's beer profits.
Currency movements continue to have a big impact on the company's reported performance. In 2017, ForEx was to Heineken's disadvantage - mainly because of the Nigerian Naira - wiping EUR817m off its sales and EUR188m off operating profits. Van Boxmeer has said he expects currency to have a similar negative impact in 2018.
Back in 2015, however, the strength of the US dollar helped increase sales by EUR109m in the Americas.
In 2017, the company helped raise US$1.75bn through two sets of debt notes totaling $1.1bn and $650m. These funds could potentially help with future acquisitions.
Heineken also claims to have "surpassed" its 2020 CO2 emissions target and wants to be using 70% renewable energy in its production processes by 2030, down from 14% now.
Last year saw the launch into 11 markets of The Blade, a countertop draught system for small outlets.
Drinks analyst and investor reactions to Heineken's global strategy are mostly positive, recognising the scale of its global business, the rise of growing emerging markets, strong and varied product mix and innovation across growth categories such as premium, craft and low alcohol, as well as the clear leadership under Jean-François van Boxmeer.
The main criticism has been that there is too much emphasis on conservative forecasting, amid a desire to under-promise and over-deliver.
Heineken will look back on 2015 as the year when its international development strategy really started to pay dividends. Building on what had been virtually a flat performance between 2013 (EUR19.2bn) and 2014 (EUR19.26bn), sales climbed 6.5% to EUR20.51bn in 2015 and then enjoyed a further 4.8% lift in 2016 to EUR20.79bn. By this point, 60% of group sales were coming from emerging markets.
This was the year that Van Boxmeer said had best demonstrated "the successful execution of our strategy"; namely, to build international growth and diversity and achieve "top- and bottom-line growth, supported by increased investment in our brands, sustained innovation, and cost efficiencies".
Based on this foundation, Heineken was able to increase sales again in 2017 across all its main reporting countries and regions. Sales were up last year by 5% to EUR21.9bn - a long way forward from its EUR18.38bn performance in 2012.
Heineken's Full-Year Beer Volumes 2013-2017
Consolidated beer volume grew 3.0% organically in 2017, with 2.6% growth in the first half and 3.5% growth in the second half. Beer volume in the fourth quarter was up 4.6%, an acceleration versus the 2.5% volume growth delivered in the third quarter due to positive volume growth in Europe and accelerated growth in the Americas.
As sales have climbed, so have Heineken's beer volumes, moving through the 200m hectolitre mark in 2016 (200.1m h/l) and up to 218m h/l in 2017. Again, this performance signifies how important the steps to build its premium business in key beer consumption markets like Brazil and across Africa has been. This is also significant growth on the 181.3m h/l volumes in 2014.
What's even more impressive is the backdrop of global beer volumes declines year-on-year.
Heineken's Full-Year Net Profits 2013-2017
Heineken's global expansion strategy might be good for long-term growth and financial health, but it has resulted in a stop-start performance when it comes to net profits. After a period of stable profit movement between 2012 and 2014 (EUR1.66bn to EUR1.71bn), net profits jumped up to EUR2.14bn in 2014, before falling back to similar previous levels of EUR1.74bn in 2016. We must, however, factor in a EUR286m asset impairment in the Democratic Republic of Congo in 2016.
Last year saw another swing in the positive direction with organic net profit growth of 9.3% to EUR2.24bn, and a 25.6% increase in reported net profits to EUR1.93bn.
Heineken has been quick to lower profit expectations for the year ahead after reporting a 40 basis point jump in operating margins in 2017. The group has stressed that this is likely to fall to 25 basis points due to costs involved in taking over the loss-making Kirin facility in Brazil.
Heineken's Full-Year Operating Profits 2013-2017
The increase in sales over the last year, coupled with improved cost efficiencies, helped Heineken's operating profits - before exceptional items and amortisation - increase 6% to EUR3.8bn, and rise on an organic basis by 9.3%. Operating profit margin was 17.2%.
This will be some comfort to the Heineken board, which has seen operating profits, like net profits, fluctuate over the five-year trading period in step with its commercial expansion plans around the world.
Starting out at EUR2.78bn in 2014, operating profits rose to a three-year high of EUR3.08bn in 2015 before falling back 10.4% to EUR2.76 in 2016.
Heineken's Full-Year Sales by Region 2013-2017
Africa, Middle East & Eastern Europe
Heineken remains firmly committed to building its presence and growth in this strategically-vital trading area. That said, its five-year performance in AMEEE has been steady rather than eye-catching, with reported sales actually down from 2015's high of EUR3.26bn to last year's EUR3.06bn.
Still, the group will be pleased to see such a strong performance over the last 12 months, with organic sales up 13.5% and a 34% increase in operating profits across the area. Volume growth in 2017 was at 5%.
Again, it was 2015 that saw Heineken's achieve its best results in the trading area with sales up 2.3% to EUR3.26bn.
Heineken has come a long way since it was returning sales of EUR2.55bn in 2013 and is in these emerging markets for long-term growth rather than immediate, high-impact gains.
The company will have been pleased to see double-digit volume growth in Russia last year, where it continues to work hard to ward off what it called "tough trading conditions" in 2015 and 2016 with "effective management, innovation and premiumisation".
Africa is where Heineken has its biggest ambitions in this trading area. In 2011, van Boxmeer told just-drinks that Africa would become "the cornerstone" of its future business as it has such growth potential for both branded mainstream and premium beers. "What Brazil is for Anheuser-Busch InBev," he said at the time, "Africa is for Heineken."
The continent hasn't completely lived up to his expectations when he anticipated back in 2011 to be "multiplying the profits from our operations in Africa by five in around eight years".
Heineken has to navigate its way around local economic and consumer difficulties in many of its key African markets, noticeably DRC, Nigeria and Egypt, which saw double-digit volume declines in 2017.
It's also proving harder than expected to gain traction for premium brands in these countries, with Nigeria, for example, still driven by growth in value brands, including Heineken's Life, The Goldberg and 33 Export brands.
The group is making good headway in South Africa, meanwhile, reflected in double-digit volume increases last year, including a double-digit rise in cider sales. It also added to its craft beer portfolio with the purchase in March 2017 of South Africa's Stellenbrau craft brewery business.
Ethiopia and Rwanda have shown good volume growth over the last four years, with the Walla brand performing well in Ethiopia. Heineken is also expanding its production capacity in Africa, noticeably in Ethiopia and Haiti, and built new breweries in the Ivory Coast and Mozambique during 2016 and 2017.
All Heineken's key markets across the Americas have seen good volume growth over the five-year period, buoyed by higher revenue-per-hectolitre and a better mix of brands across mid- to premium-price tiers. Overall sales sit at EUR6.25bn for 2017, compared to EUR4.63bn in 2014, with 6% growth in the last 12 months.
Mexico and Brazil, in particular, have grown since 2014 and seen solid growth with brands such as Dos Equis and Tecate in Mexico and Heineken, Desperados and Sol Premium in Brazil.
The group's performance in the Americas is very much linked to the strength of the US dollar, which helped increase sales by EUR109m in 2015, for example.
• The US
One of the more colourful events in Heineken's five-year US performance has been the purchase in 2015 of an initial 50% stake in California's Lagunitas Brewing Co, one of the fastest-growing and most charismatic craft players in the market, for a reported US$500m. The company was said to have paid 20 times Lagunitas' EBITDA, a price Heineken clearly believed worth paying, not just to build its US sales, but also to introduce Lagunitas' craft beers to international markets for the first time. Indeed, van Boxmeer said the hook-up would help Heineken "reach parts of the world that other craft beer brands have not."
For some, it was inevitable that Heineken would eventually move to take full control of Lagunitas, which it did in May 2017. The takeover would, according to Lagunitas' former owner, Tony Magee, allow Heineken and Lagunitas to serve "the world craft beer 24 hours a day".
• South America
Last year was another busy year for Heineken in South America. In February, the company came to Kirin Holdings' rescue when it bought its beer and soft drink assets in Brazil for US$706m. Crucially, the purchase elevated Heineken to number two in Brazil, the world's third-biggest beer market behind only China and the US, with a 20% share up from 7%. And, in 2017, the country returned double-digit volume growth for Heineken.
Previously, Kirin Brasil had been making a loss, so expect Heineken's turnaround strategy to have an impact on the bottom line in the coming years.
Heineken now owns five breweries in the country - two in São Paulo state and one each in Paraná, Rio Grande do Sul and Ceará. The brewer has been building its premium beer position in Brazil over the last four years. According to Euromonitor International, brand Heineken was Brazil's fastest-growing premium lager brand in 2015, with another double-digit jump.
"Heineken's focus in Brazil is on value rather than volume," said Anna Ward, research associate at Euromonitor. "The increasing premium focus of its offer is so far proving successful."
Heineken's already-strong Mexico business was strengthened further in 2017 with a double-digit rise in volumes. Its performance in the country is very much linked to Mexican conglomerate FEMSA, which in 2010 took a 20% stake in Heineken in return for FEMSA's beer business. In 2017, FEMSA reduced its holding in Heineken to 15%, in a sell-off that raised US$3bn.
The FEMSA deal also saw Heineken take on separate packaging business, Empaque, which it sold in 2016 to Crown Holding, raising US$1.3bn in the process. The divestment prompted the group to launch a EUR750m share buyback programme.
Meanwhile, Heineken continues to build its production capacity in the country.
With 54% of the population aged under 35, it's understandable why Asia-Pacific is such a vital market for Heineken and other major brewers. All the main countries in the region continue to show strong demand for beer, both for domestic and international brands.
Heineken claims to have market leadership in more countries in the region than any of its rivals: A claim backed up by 6% year-on-year volume growth between 2014 and 2016. Sales in value terms also grew, by 10% on average, with EBIT up 14% over the same period.
In 2015, the region accounted for 21% of Heineken's operating profits, up from 18% in 2013. In 2016, the group had 15 first-and second-positions by volume in Asia-Pacific's markets, compared to seven for Carlsberg and five for Kirin.
The year also saw a step change in Heineken's sales in the region, climbing to EUR2.89bn from the EUR2.48bn posted in 2015.
The region brought in EUR2.99bn last year, up 6.2% in sales, 9% in volume and 9.5% in operating profits. Vietnam is Heineken's biggest performer in the region and again saw double-digit volume growth in 2017, driven by the Tiger brand, premium cider and greater production capacity.
Heineken's 5% stake in what was one of the countries' biggest state-owned breweries, Sabeco (Saigon Beer Alcohol & Beverage Corp) is now worth considerably more following ThaiBev's purchase of 54% of the business in December 2017 for US$4.8bn. The move is likely to strengthen Heineken's Van Boxmeer's view that Vietnam is the "poster child" for international beer brands.
In China, the grey, or parallel, market is said to be a growing issue for Heineken and other major brewers, with Van Boxmeer directly blaming the channel for a drop in volumes in 2017. By its own admission, though, Heineken still only has a "small niche position in the super-premium segment" in China.
This is a position it surely needs to rectify soon, particularly as Budweiser's performance in China is said to have been responsible for the AB InBev brand's international sales-by-volume overtaking Heineken for the first time in 30 years, according to consultancy Plato Logic.
Finally, Heineken's performance in Indonesia, where there have been increased clampdowns on the sale of alcohol, has been mixed over the last five years, although the group enjoyed a better 2017.
For all its international expansion, Europe is by far Heineken's biggest trading area. With so many mature markets, however, it is here where the overall decline in beer drinking volumes is being most felt. There is also an inability to further push up sales from value brands to premium brands: Europe has plenty of premium offerings.
In 2012, Heineken's European sales were at EUR11.07bn. Six years later, and annual sales from the region totaled EUR10.23bn. In fact, this is a recovery from the company's lowest position in Europe: In 2014, sales were EUR9.76bn, with 2015 performing similarly.
Europe's overall share of Heineken's business is in decline, from a 2012 high when it accounted for 60% of group business, to 49% in 2015.
To grow at all in Europe, Heineken has to work even harder at cost management, innovation and brand investment, like its continued high-profile backing of the UEFA Champions League, which it has just renewed for another three years.
The brewer's international expansion also means it now has more world beers to offer demanding European markets. Indonesia's Bintang, for example, was rolled out across Europe in 2017, through the European arm of United Breweries, in which Heineken holds a 43.7% stake.
Brand extensions into cider have helped Heineken's premium volumes, which delivered a low single-digit volume increase last year to 4.9m h/l (2016: 4.8m h/l). This was helped particularly by double-digit growth in Poland and Romania.
Heineken's performance in the UK has been hit by some major delistings, noticeably in Tesco, which replaced a number of the group's brands with its own craft beers in 2017. Meanwhile, France, driven by the Desperados and Affligem brands, Italy and Spain saw good volume growth in 2017, with all three responding well to the roll-out of Heineken 0.0.
What can the beer industry learn from Heineken? - Comment
Heineken has released its 2017 results and, despite the generally-depressed state of the global beer market today, the group reported some very positive trends. It therefore merits consideration with an eye towards what others in the brewing business and, indeed, the drinks industry, in general, can learn from the world's number two brewer.
The principle lesson to be learned from Heineken is 'don't panic'
At the risk of sounding trite and clichéd, perhaps the principle lesson to be learned from the brewing giant is 'don't panic', even when your two biggest competitors, the world's largest and second largest brewing companies at the time, merge to become as one.
Make no mistake; there was plenty of room for panic when Anheuser-Busch InBev absorbed most of SABMiller in 2016, thus creating an entity over twice the size of Heineken by volume. The company could have immediately launched upon a frenzied buying spree, acquiring or attempting to acquire a number of smaller breweries or one or two of its closer-in-size competitors, simply to bulk up and stay nearer in volume and revenue the new AB InBev.
But it did not.
Instead, Heineken stayed the course it had been following for the previous decade, continuing with modest but strategic acquisitions, introducing key brands where appropriate and gradually transforming itself from a largely European-centric brewer into a truly global player.
Let's look at the acquisitions side first.
Slow and steady may not have yet won the race, with AB InBev still the preferred darling of a majority of drinks analysts, but in 2017 the strategy resulted in impressive growth of 5% in sales and 9% in organic net profits for Heineken. One key aspect of this approach has been to buy where necessary, but not necessarily buy.
Compared to its larger and acquisition-mad competitor, the total value of the 65 brewery purchases Heineken has made over the past dozen years is only US$30bn - not even one-third of the amount AB InBev paid for SAB. While the US craft brewer Lagunitas was unquestionably the highest profile of these buys, the majority have taken place in emerging markets, which now account for a full 55% of the company's operating profits.
Heineken's strategy has evidently been to keep its activities in the acquisitions marketplace as quiet and discreet as possible. And, in contrast to the much-discussed and -debated brewery purchases of its larger competitor, most of Heineken's brewery acquisitions have flown largely under the radar of public criticism, dating all the way back to the little-discussed purchase of half of the Belgian family brewer Affligem in 2000 and the almost-unnoticed purchase of the remainder in 2010. With the exception of the high-profile, two-step purchase of Lagunitas, Heineken's strategy has evidently been to keep its activities in the acquisitions marketplace as quiet and discreet as possible.
Key brand development has also been pivotal to Heineken's performance over the years, and here, again, the company stands in contrast to AB InBev. While the latter appears at times to favour a scattergun approach, developing and introducing brands at such a rapid pace that at times it seems willy-nilly, Heineken appears to take a more considered approach to the matter, strategically launching brands that reflect and strengthen its image as a brewer of premium, quality beers.
One such case in point was H41, developed for the Italian market in early-2016 to highlight both the stalled ale segment and the company's commitment to innovation in brewing, the latter via its use of an historic Patagonian yeast.
With a majority of Heineken's profits now coming from emerging markets, an obvious two-pronged lesson would be to embrace change - witnessed here in the company's transformation from a European-focused operation to a truly global one - and fearlessly approach developing markets. Particularly impressive has been Heineken's performance in Mexico, through its FEMSA subsidiary, and Vietnam. Further, it is entirely possible that the Mexican success story is poised to be replicated in Brazil through the properties Heineken acquired from Kirin in 2017, with positive signs already appearing for brands like Devassa and Eisenbahn.
There is another lesson to be learned from Heineken's emerging markets, as well, and that is to neither be cowed in existing markets nor afraid to act boldly in others. In Africa, for example, where Heineken has traditionally been one of four dominant companies - along with Diageo, SAB and Castel - the group was suddenly faced with massive power in the form of the combined might of SAB and AB InBev. Rather than react defensively, however, the company doubled down on its activities on the continent with an expansion in production capacity in Ethiopia, new brewery builds in Mozambique and the Ivory Coast and double-digit volume growth plus a craft brewery purchase in South Africa.
In Brazil, meanwhile, the company acted proactively by purchasing an underperforming set of breweries from Kirin and using them to make a bold foray into AB InBev's backyard, the largest beer market in South America. While it is still early days, the move already appears to be paying dividends.
It could nonetheless be argued that the company has not done enough to address declining volumes and sales in Europe
Still, irrespective of these positive lessons, it could nonetheless be argued that the company has not done enough to address declining volumes and sales in Europe, which for all its international expansion remains Heineken's largest continental marketplace, with sales down 7.5% from 2012, although still up from the nadir of 2014 and 2015. For this to see a more convincing reversal, Heineken will need to follow the lead of its larger competitor and address cost-cutting across the board, while pursuing an aggressive programme of innovation and brand development.
Lagunitas will help in this regard, if the company decides to actively promote the American craft brand across Western Europe, as will Heineken's now sizable stable of international brands, which could easily be marketed in Europe to satisfy the rising demand for the new and unusual.
Heineken 2017 full year results : http://www.theheinekencompany.com/media/media-releases/press-releases/20...