There's an imaginary tale making the rounds at Heineken's headquarters in Amsterdam these days. Alfred H. Heineken, chairman of his beer company's supervisory council, meets his counterparts from U.S. rivals Anheuser-Busch and Miller Brewing at a bar. August A. Busch III orders a Budweiser. Jack N. MacDonough, CEO of the Milwaukee brewer, asks for a Miller. Freddy, as the 70-year-old executive is known, waves the bartender off, explaining to his companions: "If you won't order a beer, I won't order a beer either."
Old World snobbery, perhaps. But you can't blame the Heineken crowd for sounding a bit smug. After all, the company's beer is downed by more people in more corners of the globe than any other. It's the No.1 imported beer in the vast American market. Moreover, its familiar green bottle--sold from Caracas to the Congo--is the world's first truly global brand of beer. The big American brewers are still groping for ways to push into overseas markets, but the Dutch brewer planted its green-and-white umbrellas across the world's squares and piazzas more than half a century ago. It has a network of relationships with brewers and distributors in 150 countries.
But with little or no growth expected at home, the two American giants are shifting their focus to frothier markets in Asia, Latin America, and Europe. That means the big global battle among the top three beer titans is about to begin in earnest. Miller Brewing Co., a unit of Philip Morris Cos., and Anheuser-Busch Cos. are forging foreign alliances and buying stakes in breweries around the world. Heineken is girding to defend itself against the neophytes with a big push into Asia and Central Europe. It is also scouting for new partners "to expand our growth opportunities," says Karel Vuursteen, the first chief executive to be recruited from outside in Heineken's history.
The Americans are still far behind in terms of geographic reach: Fully 51% of Heineken's $5.2 billion sales last year came from outside Europe in volume terms, while just 3.8% of Anheuser's revenues and 5% of Miller's came from outside the U.S. And Heineken was able to achieve earnings growth last year, posting $458 million in operating profits, up 8.8%, while the two foes saw profits slide in a flat market (charts).
But with their deep pockets and a little time, Anheuser and Miller could make rapid strides in new lands. Admits Vuursteen: "You should never underestimate your competitors." Already, Heineken is far more likely to bump up against troops from Anheuser, nearly three times Heineken's size, in places such as China and the Czech Republic. And Miller may be able to tap into Philip Morris' international marketing savvy, gained from decades of pushing Marlboro cigarettes and other products overseas.
CZECH ERROR? They're also making key alliances. Miller took a 20% stake in Canada's Molson Breweries last year, while its parent has bought a 7.9% stake in Mexico's No.2 brewery, FEMSA, which makes Dos Equis. Fast on the heels of that deal, Anheuser snapped up a 17.7% stake in Mexico's largest brewery, Grupo Modelo, famous for Corona. It also acquired a 5% stake in China's Tsingtao Brewery. And it is continuing to negotiate with the Czech maker of Budweiser Budvar in hopes of settling a nasty trademark dispute that has blocked it from selling American Budweiser in many markets around the world. "Four years ago, Anheuser and Miller weren't on their radar screen," warns a top rival executive. "Both now have international strategies and formidable cash flows."
Vuursteen is preparing for the coming battles. In the U.S., Heineken has recently strengthened its position by taking over its long-standing U.S. distributor and installing its own man to run the operation. Aside from low-cal Amstel Light, the Dutch are pushing new products such as Murphy's Irish Stout through their U.S. distribution network. To maintain its hold on the No.1 spot, Heineken is spending $40 million on advertising in the U.S. this year--more than all other importers combined.
In Europe, not every brewer will survive independently. Indeed, earlier this year, Miller's MacDonough stopped by Amsterdam headquarters to hoist a few brews, leaving some Heineken executives with the impression that Miller was on the prowl for deals in Europe. Heineken, of course, would be a perfect geographic fit with the Milwaukee-based company, since it is strong internationally. Guinness brewing Chief Brendan R. O'Neill, who is aware of Miller's chat with Heineken, doubts a merger is likely but suggests a marketing partnership could be in the cards.
Heineken wouldn't be a willing partner to a full-scale marriage. Philip Morris is probably the only company with the financial muscle to come up with the $7.5 billion it would take to seize control of Heineken, but Vuursteen isn't exactly receptive to the idea. "There are some companies that believe if they offer enough, then you will be for sale," says Vuursteen, his face reddening in anger. "We're not for sale."
Besides, the legendary Freddy Heineken would never allow it. He has repeatedly said he won't sell out. And he's still very much a force at the Dutch brewery, controlling just over 50% of the publicly traded company's stock. He gave up day-to-day operating control in 1989, but he's still chairman of the company's powerful supervisory council. Since his private office is just around the corner from Heineken's headquarters, he often pops in for chats with Vuursteen, whom he personally recruited from Dutch electronics giant Philips. Yet Freddy's succession remains an open question. His only child, a daughter, is not involved in the brewery business. What will happen to Freddy's stake when it passes out of his control is unclear.
"FORT EUROPE." Vuursteen, 52, isn't waiting to find out. To defend Heineken's No.1 position in the $31 billion European beer market, he's building what Heineken insiders call "Fort Europe." The goal is to make Heineken the dominant brand in an expanded Europe in the same way that Budweiser rules the U.S. market. That's hard to do with choosy European beer drinkers, especially Central Europeans, who have strong loyalties to the beers in their backyards. So Heineken is teaming up with smaller rivals in Hungary, Poland, and Switzerland, buying local stakes, planning to have them eventually brew Heineken themselves. It is currently engaged in a lengthy courtship of the Czech maker of Pilsner Urquell.
In Asia, the key Heineken bet is on a joint venture with Singapore's Fraser & Neave, called Asia Pacific Breweries, which is the maker of Tiger Beer. Aside from a financial stake of 42.5%, Vuursteen has strengthened the relationship by shifting more Heineken executives into the venture over the past year. More importantly, he has signed on to Asia Pacific's plans to spend some $460 million over the next three years to buy and build breweries.
Already, Asia Pacific has snapped up a stake in Fujian Brewery, in the Chinese city of Fuzhou, and has plans for brewery projects in Thailand and Vietnam. Vuursteen figures the Chinese beer market is growing at 20% a year, which means an additional beer volume of 20 million hectoliters--equaling the entire French beer market. That's why, through Asia Pacific, he's aiming for three or four new Chinese brewery projects by 1996.
FAD-FREE. Aside from Heineken's strength in far-flung places, the company has done well by resisting diversifying into such ventures as amusement parks and potato chips, as Anheuser has done. And unlike Miller, Heineken has refused to push for growth by spinning off faddish new beers. Miller Lite may now account for about half of Miller's $4.3 billion in sales, but it has also cannibalized sales of Miller's original full-calorie product, Miller High Life. While Heineken rolled out Amstel Light as its low-calorie brew in 1980, its separate brand name protected sales of the flagship brand.
Another Heineken advantage is its lengthy history of recruiting and training globally minded executives. Han de Goederen, Heineken's production director in The Netherlands, recalls that during his 41/2 years working in Heineken outposts in Africa, the telephone often didn't work. "That was good training for making your own decisions without the support of the group in Holland," he says. Indeed, Heineken pushes decision-making down to the local level and encourages its fast-track managers to do stints with the foreign partners. Contrast that philosophy with the Americans, who "have to do it on their own," says Roel Gooskens, a research director with Van Meer James Capel in Amsterdam.
Nor has Heineken been stingy with company knowhow abroad. Starting in 1931, when it teamed up with Singapore's Fraser & Neave, Heineken has run the technical side of the operation while its partners handled the selling. Since then, the company has followed a basic pattern in entering foreign markets. It begins by exporting, which helps boost brand familiarity and premium image. Then, if the market looks enticing enough, it will license its brands to a local brewer, expanding the volume of its beer reaching the market. If the relationship with the local brewer continues to flourish, Heineken may then take an equity stake or forge a joint venture with it.
Teaming up with a local can backfire as well. Heineken bought the Alsacienne de Brasserie Group (Albra) in the 1970s, hoping to enter the French market through the back door. But the move served instead as a warning to the big French brewers, which cut prices. Only a decade later, after combining with a much larger player and shuttering breweries, did Heineken's French operation finally begin to turn around.
But more often than not, the formula has worked. The primary goal is to piggyback sales mf its pricier Heineken brand on top of the established local brew, employing a single sales force and distribution network for both brands. That pyramid structure, with Heineken at the top and lesser-priced brands at the bottom, is important to protecting the premium image of the company's flagship. "Heineken has been through the global marketer's boot camp," says John Wakely, a beverage analyst with Lehman Brothers in London.
While it uses the home brew to cater to local tastes, the Heineken brew stays the same everywhere. Every two weeks, the Heineken "A yeast," developed by a student of Louis Pasteur, is air-shipped from Holland to the 19 breweries around the world that make Heineken. The yeast helps give the brand its distinctive taste, which British beer connoisseur Michael Jackson describes as "crisp, slightly spritzy, and grassy." And its premium image is the envy of brewers everywhere. While Heineken is an everyday brand in The Netherlands, its marketers have succeeded in transforming it into a top-shelf product almost everywhere else. In the U.S., a case of Heineken sells for twice as much as a case of Budweiser.
Despite its cachet, Heineken does face some gritty challenges. For instance, it remains far less efficient than its American rivals. The company's operating margins, estimated to reach 11.2% in 1994, are much lower than Anheuser's at 16.3%. That's a situation Vuursteen, who served as a crisis manager at Philips before joining the brewery, is hoping to change. The company cut 5% of its workforce, or 1,323 jobs, last year, most of them in Europe and Africa.
LABOR PAINS. There are more layoffs to come in Holland and elsewhere on the Continent. As a result, this traditionally paternalistic company is facing its first labor unrest ever. A strike this April cost it several hundred hectoliters of beer in lost sales. Says Production Director de Goederen: "It's been a bit of shock for a lot of people that Heineken is changing."
But with its strong cash flow, conservative balance sheet, and recognition that it needs to become more efficient, chances are that Heineken can remain independent for years. Its war chest of $900 million in cash and securities, plus strong borrowing capacity, could allow it to "easily" make a $1 billion-plus acquisition, Vuursteen says. And while the Dutch are in the strongest position of any of the big brewers internationally, they appear to recognize clearly the need to keep forging new alliances around the world. If Vuursteen can stay the course, he'll do more than merely maintain Heineken's independence. He'll be teaching the Americans their lessons for years to come.