Heineken NV (HEIA: NA) has recently demonstrated to the business world as to how to make its way in emerging markets. The Dutch company, which boasts being the third largest brewer in the world, beat the analyst expectations with a great increase in sales and profit in Asia, South America and Africa.
Premium brands, such as Desperados and Sol, have given a great help to the company, which recorded a 3.4 per cent rise in operating profits in the first half of 2015. The hot summer season and the well-made marketing choices have fuelled the firm’s sales. Also the depreciation of the euro against the dollar and the Mexican peso contributed to boost this positive trend.
“This continued positive momentum reflects the benefit from our exposure to high growth markets, a sustained focus on marketing and innovation, and the ability to drive efficiencies throughout the business. Our emphasis on innovation delivered €854 million in revenues.”
Jean-Francois van Boxmeer, CEO, Heineken
Factors of expansion
In an interview with CNBC, van Boxmeer explained the factors that led the Dutch brand to change its strategy. First of all, the volume growth is much higher in emerging markets when compared to most developed countries, at around 8% per annum. This is due to the demographic expansion and the high rate of urbanisation. Moreover, a new middle class is coming out from these developing economies, eager to enter the consumer society. A decade ago, only 20% of the business came from developing markets, today it is two thirds.
Heineken NV has recently expanded the core business, insisting also on the food segment. Focusing on countries with a large potential of growth, such as Ethiopia and Myanmar, seems to be a really good working strategy. More precisely a success, since it generated a 4.7% increase in the global market share of the brewer. In fact, leveraging on its strengths, the company managed to recover from the sluggish Western markets.
However, expanding in foreign markets is not a piece of cake. Nigeria and Indonesia notably jeopardise the positive trend of Heineken. In Nigeria, operating profits were particularly damaged by the unstable economic and political situation, which comes in addition to a brisk inflation. Meanwhile, the Indonesian government decided to restrict beer sales due to the majority of Muslims living in the country. Moreover, some movements that propose a total ban of alcohol are having a broad consensus in the Asian archipelago.
The long-run growth
After all, Heineken NV is not new in developing countries and this success is the result of a long-term study. In the past, the firm worked very well in the M&A sector, buying FEMSA, leader brewer in South American, and creating a joint venture with S&N’s in India. This brought a competitive advantage, which enabled the company to exploit the economies of scale and reduce its fixed costs.
Golden years lie ahead for the brewer, if it will be able to concentrate on new markets and on new premium brands to attract more costumers. Diversification seems the lesson to be learned by the Dutch firm, provided that the choice is accurately pondered.