Stock story: Heineken

A leaner brewer is ready for when the world returns to party mode. (Reading time: 3 mins)

Stock story: Heineken

Founded in 1864 in Amsterdam, Heineken is the world’s second-largest brewer. Founding family members remain key stakeholders in the business, providing the company with a long-term investment horizon that is well aligned with minority shareholders. This stewardship has boded well for Heineken’s international expansion strategy over the past 40 years that culminated in the acquisitions of Scottish & Newcastle (2008), FEMSA Cerveza (2010) and Asia Pacific Breweries (2012). These added brands such as Strongbow, Sol and Tiger to the portfolio and established for Heineken a strong presence in Indochina and Latin America amid a backdrop of rapid industry consolidation globally. Today, Heineken produces over 300 beer, cider and ready-to-drink brands retailing in more than 190 countries. The company accounts for about 13% of global beer market volume and an estimated 11% of global beer profits.

The beer industry benefits from a favourable industry structure as most markets are effective duopolies or oligopolies. While the industry is highly competitive, brewers tend to compete on brand, functionality, quality and marketing rather than price. In fact, during periods of above-average inflation, brewers have demonstrated strong pricing power with limited declines in volume growth. Heineken’s durable economic moat is further strengthened by advantaged access to distribution in key markets and economies of scale at large brewing sites. 

A bonus is that Heineken’s portfolio of brands is benefiting from shifts in consumer demand. Consumers across the world are drinking better due to rising incomes, aspirational consumption trends and a desire for quality. They are also increasingly health and wellness conscious, preferring brands with a natural image and ingredients, or lower alcohol and calorie content. Heineken is favourably positioned for these premiumisation and consumer preference shifts as more than 40% of the company’s revenue is from brands that retail for more than the average pint. Heineken’s latest brands offer diversity ranging from zero alcohol to seltzers and ready-to-drink cocktails. In addition, the flagship Heineken-branded beers comprise nearly 20% of revenues; growth over the past four years was more than double that of the rest of the portfolio. This portfolio exposure contributes favourably to profits as the company grows.

A few macroeconomic and social risks could pose a challenge to Heineken. With more than 50% of revenue generated from emerging markets, the company is exposed to volatile sources of economic growth. Furthermore, the covid-19 pandemic created a challenging operating environment for global brewers. Currency devaluations in Latin America, the closure of bars, pubs and restaurants globally and, in some cases, bans on the sale of alcohol, as well as rising input costs for key ingredients have and still pose short-term challenges to earnings. In response, Heineken launched a large cost-savings program to eliminate two billion euros of costs throughout its more than 80 operating companies. By removing more than 10% of its total costs, the brewer hopes to restore margins to pre-covid-19 levels by 2023 and position the business to benefit profitably as sales recover. Overall, Heineken provides a high-quality portfolio of brands and offers attractive reopening exposure for when the world reopens and trade rebound.

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