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Heineken


History stares Heineken boss Anthony Ruys in the face every morning when he shows up for work. The Dutch brewer's chief executive sits in a dark-paneled office surrounded by stern portraits of three generations of Heineken ancestors. The corporate offices in Amsterdam extend from the building that once served as the family manse. And if Ruys were ever to forget that he was the guardian of a company that traces its roots back more than 400 years, he would have to reckon with his main shareholder: Charlene de Carvalho-Heineken, a descendant of the company's founder. "There's a long tradition," says Ruys with typical Dutch understatement.

Starched white collars are no longer the order of the day at 21 Tweede Weteringplantsoen, but Heineken headquarters is still a pretty buttoned-down place. True, the vending machines in the corridors are stocked with -- what else? -- Heineken. But they're programmed not to dispense the brew until after 4 p.m. "Not much has changed" since Charlene's father, Alfred H. "Freddy" Heineken, ran the company, says Ruys, a 56-year-old former Unilever executive who was elevated to the top job 10 years after joining the company, a relatively short tenure by Heineken standards. Freddy, a legendary bon vivant with a hard nose for business, passed away last year. And while no one from Ruys on down would dare dishonor his memory by claiming that anything as radical as a revolution is in the making at Heineken, there's an unmistakable whiff of change in the air.

It's about time, too. The world's No.3 brewer, with $11 billion a year in sales, can no longer take for granted the strengths that have made its squat green bottle the envy of the business. Budweiser may have crowned itself the "King of Beers," but it only reigns in the U.S. Heineken, recognized everywhere from Houston to Hong Kong, is the closest thing there is to a global beer brand. That's an achievement none of the world's top brewers, from No.1 Anheuser-Busch to No.2 SABMiller and No.4 Interbrew, have been able to match.

Trouble is, the $367 billion world beer market is changing. Beer consumption is declining in the U.S. and Europe, the source of two-thirds of Heineken's profits, thanks to tougher drunk-driving laws and a growing appreciation for wine. At the same time, the beer marketplace is becoming ever more crowded, thanks to a flood of new brands, from low-carbohydrate brews to imports from Italy and the Czech Republic. But the numbers of players are shrinking. Heineken, one of the first European brewers to realize the value of cross-border deals, now risks falling behind more aggressive rivals. To overcome these challenges, Ruys is pushing Heineken to break out of its play-it-safe corporate culture. Freddy had a knack for marketing, but he was financially conservative and in later years held Heineken back, even as SABMiller and Interbrew grew through big-ticket acquisitions. Heineken's future success will depend on preserving Freddy's spirit -- while meeting challenges that Freddy never anticipated.

Ruys is already making his mark. He shelled out more than $3 billion last year for a dozen acquisitions. The biggest target, BBAG, a family-owned company based in Linz, Austria, was one of the first brewers to go east after the collapse of the Soviet bloc. Once the $2.1 billion deal closes later this year, Heineken will be the biggest beermaker in seven countries in Eastern Europe. Advertising and packaging are becoming more daring, in a bid to capture the sought-after twentysomething segment. Witness the recent debut of Heineken's silver-and-green aluminum "bottle," which sells at trendy clubs in Europe and the U.S. for three times the price of Heineken on tap. "Our strategy is right, but we can be sharper after so many years of success," says Ruys.

That success is no longer guaranteed. The convergence of a weak global economy, an unusually rainy summer in the U.S., and SARS, which emptied watering holes across Asia, will break a six-year streak of double-digit profit growth. Then there's the strong euro, which is crimping earnings from the U.S., a market that accounts for more than a quarter of all profits. Analysts now estimate the company will just barely match its net profit last year of $900 million on sales of $11.6 billion. But even in the face of all these obstacles, the Dutch brewer has managed to defend its global market share of 7%. "The brand Heineken is as healthy as it has ever been," concedes Joseph J. Fisch Jr., who imports rival Dutch lager Grolsch into the U.S.

Others are not so sure. Some worry the company could face years of flat sales. "We are nervous that what some commentators see as a one-off blip could be rather fundamental," says Ian Shackleton, a London-based analyst for Credit Suisse First Boston (CSR) which rates Heineken "underperform." Over the past 12 months, Heineken's share price has declined 10%, to just under $37.

Top management in Amsterdam is not quite panicked, but there's definitely a sense of urgency seeping into the ranks. Heineken's boss is resorting to tough tactics to stir the troops out of their complacency. A video produced for staff viewing only features a young Italian man saying: "I hate beer." The message: Heineken needs to win over consumers who haven't yet developed a strong loyalty to a particular beverage. That's why Ruys and his top lieutenants have been travelling to places like Madrid and Shanghai to down a cold one with groups of randomly selected young people.

It's a tough balancing act -- reaching out to younger customers without alienating the middle-aged beer drinkers who are Heineken's core customers. "Heineken seems to be an obsolete brand to me," says V?ronique dos Santos, a 29-year-old human-resources assistant in Paris who favors Mexican import Corona or Desperados, a tequila-flavored concoction. "It's in danger of becoming a tired, reliable, but unexciting brand," warns John A. Quelch, a professor at Harvard Business School who has studied the beer industry.

Lucky for Heineken, it owns Desperados. The brand is produced by French brewer Fischer, which Heineken acquired in 1996. Such niche labels are a small, but profitable avenue for growth. Paulaner, a wheat beer Heineken picked up in Bavaria, is finding a market in the U.S. And in one of globalization's ironies, Amstel Bright, a light-tasting lager brewed in the Dutch colony of Cura?ao, is being exported to the Netherlands, Amstel's birthplace.

Ruys & Co. aren't stopping there. To spice up the image of its namesake brand, Heineken is giving marketing a makeover. It has arranged tie-ins with big-budget youth films, such as The Matrix: Reloaded, and sponsored events such as a sweepstakes where winners got to attend a Heineken house party in Jamaica. Yet management has been careful not to stray into the testosterone-soaked territory that is the domain of rivals like Adolph Coors Co. One new commercial features blond triplets and an exploding keg -- a spoof aimed at the Coors twins. The strategy has started to pay off in the U.S., where the average age of the Heineken drinker has descended from about 40 in the mid-1990s to the early 30s today. Ruys's goal is to push that down into the high-20s in coming years.

Heineken's not exactly the only company trying to score with twentysomethings. Today's beer drinkers are awash in a sea of choices. Consider the $67 billion U.S. market, probably the most keenly contested of them all. There, Heineken beer and its sister brand, Amstel Light, which together have about 22% of the import market, are under attack from an ever-growing constellation of imports and malt-based drinks such as Smirnoff Ice and Sky Blue. Americans developed a taste for thirst-quenching Corona while vacationing on Mexican beaches, helping the brand overtake Heineken in the late 1990s to become the top import in the U.S.

Meanwhile, SABMiller, the product of last year's merger of South African Breweries and Milwaukee-based Miller, is pushing its Czech-brewed Pilsner Urquell, while Brussels-based Interbrew is making inroads with Stella Artois. Even Anheuser-Busch, which commands an eye-popping 52% of the domestic market, is playing the import game: Anheuser World Select, which debuted earlier this year, is fashioned from imported hops and comes in a green bottle suspiciously similar to Heineken's. There's a reason the premium market is getting so crowded: Beer consumption in the U.S. has declined 1% since 2000, amid tighter drunk-driving laws. But at the same time, imports have grown 16% as consumers choose quality over quantity.

The U.S. is just one battleground. The beer industry is in the midst of a furious wave of consolidation. The business is more fragmented than most: The top four brewing companies control less than a third of the global market. By comparison, the top four spirits makers control half the world market. But that's changing as big brewers scramble to acquire strong local brands and the distribution networks that go with them. "The era of global brands is coming," says Alan Clark, Budapest-based managing director of SABMiller Europe, which snapped up Italy's Peroni in May.

Heineken has a head start there. It ranked second only to Budweiser in a global brand survey jointly undertaken by BusinessWeek and Interbrand earlier this year. Heineken "is recognized everywhere," says Kevin Baker, director of alcoholic beverages at British market researcher Canadean Ltd. How recognized? One U.S. wholesaler recently asked a group of marketing students to identify an assortment of beer bottles that had been stripped of their labels. Only one incited instant recognition: the stubby green Heineken container.

No company can afford to pin its entire fortune on a single product, however. That's why Ruys has spent the last year adding new labels to Heineken's shelf, pouncing on brewers in places like Panama, Egypt, and Kazakhstan. In Egypt, Ruys bought a majority stake in Al Ahram Beverages Co. and hopes to use the Cairo-based brewer's fruit-flavored, nonalcoholic malts as an avenue into other Muslim countries.

Now Heineken plans to take a breather, according to company execs. "We are interested in growing, but not at any price," says Ruys. Heineken has dropped out of the bidding for German brewer Brau und Brunnen, whose stable of national brands is likely to fetch a hefty premium over the company's $430 million stock market value.

Tightfisted Freddy would probably have balked at paying so rich a price. But these days it's his only child and heir, Charlene, 49, and her husband, former Olympic skier Michel de Carvalho, who call the shots. As Heineken's controlling shareholder, the London resident and mother of five retains a say over a broad range of business decisions, from new packaging to acquisitions, though she is nowhere as involved in the day-to-day running of the company as her father was. "Must-have strategic acquisitions will always be looked at," says Michel de Carvalho, 59, a member of Heineken's supervisory board and Vice-Chairman of Investment Banking at Citigroup in London. (De Carvalho traditionally speaks for the family.) Proof of that is Heineken's decision to cough up $2.1 billion for BBAG. Deutsche Bank figures that Heineken won't recover the cost of capital -- the deal is being financed with a mix of cash and loans -- until 2007 at the earliest.

Publicly, the Heineken heiress has vowed to keep the company independent. Last year, addressing shareholders of Heineken Holding, the separately traded company that controls just over 50% of the operating entity Heineken NV, she said: "We are a part of [Heineken's] past, its present, and its future." However, industry insiders speculate that Freddy's daughter might be willing to sell the family jewels if the price was right. A hostile takeover would be all but impossible under Heineken's current ownership structure. "Our mission is to hand a healthy company to the next generation," says de Carvalho, who rules out any sale of the company.

Despite last year's changing of the guard, the past remains very much present at Heineken. It's all about evolution -- not revolution. The company's advertising remains refreshingly offbeat, a nod to Freddy's wry sense of humor. One commercial in the U.S. showed a young man plunging his arm deep into a barrel filled with ice and bottled beer. He gropes around fruitlessly until his whole body begins to shiver. Finally, he hauls out a Heineken. Popping it open, he joins a group of friends -- who are gripping Heinekens and shivering. "They've done a very good job of not being snooty -- using accessible jokes and imagery," says Bob Garfield, ad critic of trade weekly Advertising Age.

The Dutch brewer is stepping up marketing to Hispanics, who account for one-quarter of U.S. sales. A new Spanish-language spot shows a group of men playing dominoes. They pause for a moment as one of them demonstrates how to pour a glass of beer without stirring up too much foam. "Heineken is for professionals -- in beer," says a voice-over. "We want to bring over the values of the brand in a different way," says Frans van der Minne, president and CEO of Heineken USA Inc. Heineken may move a little slower than its competitors, but no one questions its staying power. "It takes a long time to build a brand. People today are not prepared to put that time in," says Sir Frank Lowe, founder of London-based Lowe & Partners Worldwide, which handled Heineken advertising in Britain and the U.S. until a conflict emerged with another client, Interbrew. Heineken, he says, "has the will and patience to stick it out." Looks like the slow pour could still win in the end. By Jack Ewing in Amsterdam, with Gerry Khermouch in New York and Jennifer Picard in Paris


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