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acquisitions (Exhibit 9.24). Miller, owned by Philip-Morris, started a price war in 1997, and it is continuing. Price competition will force companies to drive down costs, leverage brand names, and rationalize excess capacity.

There are two distinct strategies for brewers: They can specialize by focusing on a specific link in the value chain or become a geographic integrator. The specialization strategy involves breaking the industry business system into product development, brewing, packaging, distribution, and marketing, and subsequently becoming the global leader in one or two of these links. Guinness, for example, has focused on a product with a unique flavor that it exports from its home base with aggressive global marketing. Boston Beer Company runs a ''virtual" beer company in which it controls product development and marketing but contracts out most production. Geographic integrators such as Heineken and Interbrew, on the other hand, purchase underperforming breweries or breweries in developing countries and apply best practices in brewing, distribution, and marketing.

Heineken's Financial Performance

To evaluate Heineken's financial performance, we compared its performance to that of other large, publicly traded beer companies using both stock market-based measures and underlying financial indicators. We compared Heineken to companies that produce mostly beer, as opposed to broader consumer goods companies where beer is just one of a host of products: Anheuser-Busch, Carlsberg, and South African Breweries. Exhibit 9.25 shows Heineken's size relative to its peers. Of these companies, Heineken is the second largest in revenues, at $7 billion in 1998. That is

about half as large as Anheuser-Busch and marginally larger than South African Breweries. Heineken's 1998 EBITA is also second largest at $0.7 billion, but in this case only about a third as large as the leader, Anheuser-Busch.

Performance in the Stock Market

We compared these companies using two indicators of stock market performance: total returns to shareholders and market value added. TRS includes share price appreciation and dividends and measures the wealth creation of companies during a specific time period.

Market value added compares the market value of a company (both debt and equity) to the amount of capital that has been invested in the company (fixed assets, working capital, and investments in intangibles from acquisitions) and measures the market's perception of wealth creation capability. Market value added can either be expressed as a ratio or as a dollar amount. We use a ratio to adjust for size differences.

Heineken was the top performer among its peers in total returns to shareholders (Exhibit 9.26), when measured over the last one, three, and five years to 1998. Over the last five years, Heineken's shareholder returns have averaged 34 percent per year, much higher than Anheuser-Busch, at 25 percent. (These are in local currencies, not in a common currency. We tested total returns in U.S. dollars and found the relative performance to be the same.)

Heineken's market-to-book ratio is 3.3 and its market value added is $13 billion (Exhibit 9.27). This means that the market assigns a value of $3.30 for every dollar invested in the company. Heineken's market-to-book is about the same as that of

Exhibit 9.25 Relative Size of Leading Brewers

Busch and much higher than Carlsberg or South African Breweries. Heineken's market value added is much less than Busch because it is a smaller company.

Considering both market-to-book and returns to shareholders, we conclude that Heineken is not only perceived as a strong performer, but has been clearly exceeding market expectations. Busch, while valued highly, probably hasn't beaten market expectations in the five years to 1998. Carlsberg is a clear underachiever both in perceived performance and relative to market expectations. South African Breweries is harder to evaluate, given that its performance is heavily influenced by the decline of the South African currency, the rand.

Underlying Financial Performance

The performance of the companies in the stock market has been consistent with their underlying financial performance. Exhibit 9.28 summarizes the underlying growth and returns on capital. Anheuser-Busch's higher market-to-book is primarily driven by a greater ROIC, 16.1 percent in 1998 versus 11.6 percent for Heineken. (The companies have roughly comparable costs of capital. Our sense is that the market expects future ROICs to be in line with historical performance.) Heineken has grown faster,6 which is partly due

Exhibit 9.27 Market-to-Book Value

Company

MV of debt

Adjusted BV of

Market value

Market to

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