FEMSA acquisition –The Heineken’s profit growth accelerator

Heineken’s decision to acquire FEMSA is a strategic step towards its market development. It increases Heineken's exposure to the faster-growing emerging markets in Mexico and Brazil, and enhances support to its sluggish European and US market in year 2009. Though, this profit bar raising deal for the Heineken is having some challenges also.

The vision behind the acquisition was delivering some key strategic benefits globally for Heineken N.V. such as:-

Þ      Heineken needed FEMSA to increase its presence in the 35% of the profit generating emerging markets in US and Latin America, where the company has lower exposure than its big rivals.

Þ      Accessing the world’s 3 out of the 4 largest beer profit pools ie Mexico, Brazil and USA which represents 35% of the global beer profit share.            

Þ      Targeting the growing Hispanic segments in the USA and strengthening Heineken’s leading position in the highly profitable beer market in the world. The deal enhances the Heineken’s leading position in the US import market.

Þ      Making Heineken’s leading international portfolio strong with the addition of the  Dos Equis ,

Tecate and Sol brands.

Þ      The acquisition makes Heineken one of the only two beer makers in Mexico, the world’s fourth-most profitable market, and reduces the company’s reliance on slower-growing European markets. Heineken, which distributes FEMSA beers including Dos Equis in the United States, expects savings of 150m Euros a year by 2013 and said it will use the acquisition to sell FEMSA brands in Europe and Heineken in Mexico.

Þ      FEMSA Cerveza’s established distribution channels and strong presence in market, offers significant scope to accelerate the growth of the Heineken brand in the premium segment in both Mexico and Brazil.

Þ      Heineken access to strong revenues and cash flows, consolidating its position as the world’s second largest brewer by revenue (€16.7 billion) after A-B InBev.

So far this deal has proved very lucrative for Heineken. Some positive facts and figures are very clear from Heineken’s Half-Year results for 2010. It is reaping all the previous mention benefits which it has targeted through this deal:-

Þ      Consolidated beer volume grew 5.6 million hectolitres driven by first time consolidation effects of FEMSA Cerveza.

Þ      The deal has boosted Heineken's share of global beer volume to 9.2% from 6.9%, and total revenue to almost 17 billion euros, cementing its No. 2 position behind Anheuser-Busch/InBev .It has consolidated Heineken‟s position as the world’s second largest brewer by revenue and third largest by volume, and has expanded its exposure to developing beer markets. In addition, it has created a platform for future value growth in three of the four largest beer profit pools in the world.

Þ      The volume of FEMSA beers sold by Heineken to retailers in the US rose in the third quarter.

Þ      Significant opportunity for premium segment in Mexico, especially in the more affluent North/North West regions where FEMSA Cerveza is strong.

Þ      10-year exclusivity arrangement with OXXO, Mexico’s largest convenience stores chain.

Þ      Revenue increased 5.2% to €7,520 m

Þ      The FEMSA Cervenza deal has also boosted investor’s confidence in Heineken management, long criticized for focusing on slower-growing developed markets.

The company Heineken is having lots of plans to improve the performance of FEMSA under the Heineken’s global experienced management team. The aim is to make the most of the benefits of FEMSA‘s brand and position in the Latin America and USA. It expects €150 million in annually synergies by 2013, which taxed and capitalized are worth €1 billion.

Though, this deal is also having certain challenges to meet on its ladder to success:-

Þ      The dominance of Anheuser-Busch InBev, Modelo and SABMiller and the instability of certain markets in Latin and South America creates a very challenging environment for Heineken-FEMSA acquisitive growth in the region.

Þ      The deal has added another €2.1 billion of debt to Heineken's balance sheet, atop the €8 billion already there.

Þ      In order to increase the shares of their premium Heineken brand in Mexico and Brazil to justify the price tag they might cannibalize FEMSA brand in the process.

Þ      The purchase of the Newcastle has effectively doubled down the Heineken’s share on mature markets, now the pressure is on the Heineken-FEMSA deal to compensate that.

Þ      After the acquisition now the management team of FEMSA will focus more on the OXXO convenience store chain and on Coke FEMSA, which can be proved as a hurdle in the aggressive growth strategy of Heineken.

Þ      FEMSA’s expansion in soft drinks and convenience stores outpaces beer, FEMSA Cerveza accounted for 16% of FEMSA's revenues in the first nine months of 2009, down from 18% in the same period previous year, which is a point to keep an eye upon.

Þ      FEMSA brand Sol hasn’t done well in Brazilian market last year.

Þ      Continuous innovation in flavour and products supported with aggressive marketing strategies and potential health benefits is swaying the market away from beer in favour of wines and spirits.

Þ      The popularity of craft beers reflects an attitude change among U.S. consumers. Industry giants face slowing U.S. sales as smaller brewers gain from Americans' growing taste for craft beers. In the first half of 2010, sales volume at craft brewers rose 9 percent while overall sales volume for the U.S. beer industry dropped 2.7 percent. Craft beer makes up about 7 percent of the total U.S. beer market. Player like Boston Beer (largest Craft brewer in US ) and Molson Coors are taking the better advantage of this situation.  

Impact of Heineken FEMSA deal on the Global Beer Industry:-

Þ      The world's four biggest European brewers now account for over 50% of the global market for beer after the acquisition of FEMSA by Heineken. Belgium-based Anheuser-Busch InBev, London-listed SABMiller, Heineken, and Denmark's Carlsberg have moved ahead of the rest of the players led by China's Tsingtao Brewery in fifth place.

Þ      The Acquisition has marked the strong move of the Heineken to the growing beer market.(Brazil, Mexico and USA).

Þ      Mexico, after this deal, could be closed to acquisitions due to its duopolistic landscape, with Heineken/FEMSA and Modelo being the major brewers with a combined 97% market share. Anheuser-Busch InBev, with a substantial stake in Modelo, means acquisitive entry into this market would be impossible unless it decides or is forced to sell or reduce its stake in Modelo.

Þ      The deal has created the platform for the cut throat competition among the world’s 3 largest beer brewers in the American region.

Recommendations:-

Þ      Buying FEMSA presents substantial challenges. The Heineken must upgrade FEMSA’s beer business, which has delivered sluggish profits on declining volume, amid intense competition.

Þ      On the current economic scenario, Heineken could explore and concentrate more on FEMSA’s low cost packaging of beer to penetrate the price sensitive beer market in Latin and South America.

Þ      The Heineken should make sure that any of the FEMSA brand should not be cannibalized by the Heineken brand in the process of promoting the Heineken brand in the American region. 

Þ      The predicted growth for the world beer market is 3% in 2010 in comparison to 0.1% in 2009; Heineken should take advantage of this lucrative situation.

Þ      Brazil, the Latin American region's largest beer market, is dominated by Anheuser-Busch InBev, but there are a few brewers which could facilitate entry into this attractive market, namely Schincariol and Petrópolis. Now after the acquisition of FEMSA, the Heineken should keep close watch on Schincariol and Petrópolis.

Þ      As consumer are becoming more health, environmental and social life conscious, the Heineken  should continue focusing on its 'Brewing a Better Future' programme. It can give good social image to the company particularly in the developing countries’ region like Latin and South America and Africa.

Þ      Craft and Lager beer is in huge demand in the largest beer market like China and USA and growing market like Africa and Middle East. This Category is taking the profit out of the pocket of the big players. The Heineken should make proper strategies to encounter this situation.

Þ      Most of the African countries are now enjoying the political and economical peace and stability. China is doing huge investment in the infrastructure development of many of them. There is a huge growth of middle class in the region, which has increased the demand of beer in the region. The Heineken should capture the growing demand very well.

Þ      By keeping in mind the tough competition in the American region and the consumer becoming choosy on product, the innovation and NDP strategies should be at par to the other leading companies for better growth.

Þ      The beer market is not homogenous; there are multiple segments of consumes with unique kind of demand and different perception about the brands, in this kind of situation clear communication about the brand image and its positioning to the target segment becomes essential. Emphasis should be on value based branding, proper marketing strategy and high quality advertisement and promotion programmes. These areas might need more investment and expert supervision from the Heineken management.

The FEMSA acquisition is proving itself on the right track till now; the fact is visible from the Heineken’s half year report. However, this so far success story of the acquisition has leaded the path for more JVs, mergers and acquisitions in the fast growing regions of the global beer industry.