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Volatility of input costs
Pricing strategies are top priority in all of our markets. This
includes assessments of customer, consumer and competitor
responses based on different pricing scenarios, which will have
different outcomes market by market. In principle, we normally
pass on increased input costs, market circumstances permitting.
In 2010, the poor harvest outlooks for key grain and hop markets
had an adverse impact on the price level. In addition, in Central
and Eastern Europe, the barley harvest of 2010 was poor
in quantity and quality, which, as a direct consequence had
an impact on the price level of brewers' malt.
Heineken is leveraging its scale by making use of flexibility
in contracts and active hedging as well as our significant
presence in the relevant markets. This brings economies
of scale, minimises impact of increases in input costs, and
maximises opportunities for cost reductions and other
commercial terms. In 2010, a significant part of input costs
were covered via Group-managed contracts. In previous years,
our hedging strategy provided an effective shield against peak
prices and similar strategies are now ensuring that we secure
2011 and future supply at effective, if not always minimum, cost.
During 2010, we saw a continuation of volatility in certain key
commodity markets and we continue to evaluate and maintain
risk strategies to protect input costs from this effect. We have
hedged most of the 2011 aluminium requirements. We are
actively investigating a significant increase in scale of our
hedging arrangements, but our approach will continue to
balance longer-term contracting, close knowledge of key
strategic commodity marketplaces as well as hedging strategies.
Political instability and natural disasters in developing countries
Latin America and Africa are important developing regions
for Heineken as its global volume growth is driven by volume
growth in these regions. Heineken has an increased exposure
to the domestic environment and stability in these regions.
Political instability and natural disasters (e.g. earthquakes and
hurricanes) in these regions, could adversely affect earnings
and cash flow.
Economic downturn
Heineken's regular business activities and performance are
impacted by changes in the economic environment following
the global economic downturn, in particular in the on-premises
segment. The global economic downturn also impacted
consumers' behaviour as a result of the rise in discount brands
and retailers following the economic downturn. The economic
crisis has impacted our regular business activities and
performance, in particular consumer spending and solvency.
Additional monitoring and mitigation actions are being
implemented following recent deterioration in clients' solvency.
However, the business impact differed across the regions and
operations. Local management has assessed the risk exposure
following Group instructions and is taking action to mitigate the
higher than usual risks. Intensified and continuous focus is being
given in the areas of customers (managing trade receivables and
loans) and suppliers (financial position of critical suppliers). Also,
management attention is given to our relationships with banks
(see capital availability risk) and insurance companies (credit
worthiness (re)insurance companies). Regional Management
and involved Global functions oversee the effectiveness of
management analysis and actions.
Operational risks
Reorganisations and change programmes
Continuous business improvement and/or restructuring projects
(amongst others, initial centralisation of back office activities
and other rightsizing activities) have been realised, are under
way or in the process of preparation. The supply chain,
wholesale business and support functions in Europe and the
Americas have been impacted the most. A potential negative
impact such as restructuring activities requires pro-active
management and communication to prevent the continuity
of daily operations from being adversely affected.
Company-wide strategic programmes are overseen by the
Executive Board, whilst change projects at regional and local
level are directly managed by appropriate management teams
including capacity allocation and priority setting. The Operating
Companies concerned manage reorganisation projects with
care, the right speed, alignment with relevant industrial and
external relations and consistent communication to employees.
Contingency plans have been put in place and clear targets are
set on achieving the main change objectives. Risk Management
is an integral part of the running of change projects.
Business integration
In the pursuit of further expansion, Heineken seeks to strike
a balance between organic and acquired growth. Recently,
Heineken has been very acquisitive with transactions in
emerging markets, e.g. the acquisition of the beer operations
of FEMSA in 2010. In any acquisition, Heineken is faced with
different cultures, business principles and political, economic
and social environments. This may affect corporate values,
image and quality standards. It may also impact the realisation
of long-term business plans, including synergy objectives,
underlying the value of newly acquired companies.
In order to mitigate these risks, Heineken continuously improves
its business development and integration activities. This includes
significant involvement of relevant Global functions, Operating
Companies and Regional Management in carrying out effective
due diligence processes and preparing 'take charge' and
integration plans. Heineken has best practice programmes in
place for acquisition and integration processes, which include
standardised acquisition and due diligence processes.
Supply continuity
Discontinuity of supply of our products could adversely impact
sales volume but is not considered a major risk due to both
relative size and geographical spread of operations. All
Operating Companies should implement a business continuity
plan for all type of main crises. However, specific attention is
given to the supply of beer from the Netherlands to profitable
Heineken N.V. Annual Report 2010
