How to Get Beer Across the Border

The CFO of Heineken USA recently faced a tough challenge: getting enough Dos Equis stocked in time for Cinco de Mayo.
David Katz and Vincent RyanMay 14, 2010

Before April 30, Heineken USA was the exclusive importer for FEMSA, a Mexican brewer noted for a portfolio of popular beers. At that point the company’s Dutch parent, Heineken, officially acquired FEMSA, thereby becoming the owner of the portfolio and its crown jewel: Dos Equis, one of the hottest imports in the beverage world. Spurred by the beer’s “Most Interesting Man in the World” commercials, monthly sales of the brew have risen 20% to 30% compared with a year ago, according to Dan Sullivan, Heineken USA’s chief financial and operating officer.

But the beer’s popularity posed a problem for Heineken USA. The Cinco de Mayo holiday was approaching on May 5, a Wednesday, and the company’s future sales indicators were showing that it might not have enough product to supply what was likely to be a huge number of beer drinkers on that day. Although Cinco de Mayo is a minor holiday in Mexico, it has become a major occasion for beer consumption north of the border. “Our concern was: there simply wasn’t enough inventory in the trade,” says Sullivan.

To make sure that there was enough, the company had to scramble to get cases of Dos Equis — as well as Carta Blanca, Tecate, and other brands — to wholesalers in time for them to get the beer to vendors by Cinco de Mayo. During the Saturday and Sunday before the holiday, FEMSA pushed about four days of normal shipments across the border in two days.

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On May 6, Sullivan sat down with CFO editors to talk about the Cinco de Mayo “crisis,” as he calls it, and other challenges he faces as a finance chief. An edited version of the interview follows.

Why were U.S. beer sellers short on Dos Equis headed into Cinco de Mayo?

We had two issues to deal with: the issue of growing demand as the Dos Equis brand took off, and importing brands out of Mexico. Dealing with the border crossing in Mexico is a huge challenge. In the month of April, as we’re getting ready for Cinco de Mayo in the United States, it’s produce season in Mexico. When truck drivers picking up beer in Mexico get to the border, they realize they can make twice as much if they take the produce because it goes bad quickly. So they’ll drop the beer and pick up the produce. The beer just sits there until we can get someone else in to pick it up. We were experiencing as much as 70% order drops, meaning they get to the border and drop it.

Why doesn’t the company have dedicated truckers?

It’s quite expensive. In the United States, unlike Mexico, you’re actually better served outsourcing that. You’ve got reliable third-party entities that are good at what they do. But dealing with getting the beer from production facility to the border and across the border into the United States was a challenge. We were able to mitigate that through forecasting tools and better commercial projections. We’ve gotten much more targeted in projecting our demand. We don’t just produce everything and ship it all and hope to God it all works out. Even then you’re still subject to human nature, that individual truck driver.

HeinekenUSA CFO

How did you cope with the trucking issue?

We leveraged three things; one we had to pay for. One, we had to start matching produce-trucking costs, which are quite expensive. Two, we relied on FEMSA to secure additional truck capacity. We were renting vans and moving trucks. It wasn’t pretty, and we did whatever we had to do. Three, we used our scale in the U.S. to get our freight forwarder to free up about 10% more trucks to get down there from Dallas, Houston, and Austin.

As CFO, what was your specific role in this crisis?

Since I have operations reporting to me as well as finance, I was in the middle of this. And at the time it happened I was in Mexico, because I am working on the FEMSA integration. Aside from helping my team be in the right places to make the right decisions, the biggest thing I did was to define success as getting the product to the trade, not as lowering cost or increasing efficiencies. The team needed to be told that the most important thing right now for the next six days is this, and we’ll figure out the collateral damage later. This isn’t the time to pinch pennies.

How do you forecast demand?

Under U.S. alcohol regulations, Heineken can’t sell directly to a consumer. Because we’re selling to the wholesaler, who’s then selling to a retailer, who’s then selling to a consumer, our demand curve can get difficult to see. When you walk into a 7-11 and buy Heineken, we’re three levels removed from you. That creates an added challenge for us in pure demand forecasting. We ultimately have to account for consumer demand mostly through information purchased from A.C. Nielsen, IRI, and the like.

To do proper demand forecasting, we also have to look at our own internal systems, where we record sales and have visibility into the wholesalers that we’re selling to. We have to triangulate all of those sources of information to get a true demand picture.

What’s the relationship of your finance team with the home-office finance team in Amsterdam?

Heineken is organized by region. Heineken USA reports into Heineken America, and there are Western Europe, Central Europe, and Asia. I functionally report to my boss, the CEO of Heineken USA. I have a dotted-line report to the finance function in Amsterdam, but we are governed and managed by the regional office.

What implication does that have for your relation to the capital markets?

The capital market management process is done out of Amsterdam. We’ve centralized core functions like corporate relations, investor relations, treasury, and equity markets there. But because of the strength of the U.S. capital market and given its sensitivities, we play a strong role in supporting them through investor-relations work. Although financing vehicles like those involved in the FEMSA acquisition and in items like building a new brewery, for example, are managed by Amsterdam, they are done in conjunction with us from a treasury and tax point of view.

Here in the United States, we have independent relationships with our banks. We have full autonomy to set up revolving lines of credit and debt facilities, absent Amsterdam.

It’s been reported that even in a downturn in the beer markets, Heineken is committed to maintaining — or even increasing — prices. What’s the company’s pricing strategy?

We took a 4% national price increase in the heart of the recession. One reason is that we are a premium brand, and part of the way “premiumness” is defined is price position. Also, we look at top-line growth as a huge business enabler for us. Our chairman often says that you can lose market share and get it back, but you can’t lose margin and get it back. Once you’ve lost it, you’ve lost it.

You’ve talked a lot about your Cinco de Mayo crisis. What’s the next hot issue for you?

Integrating the FEMSA acquisition is front and center for us right now. That will consume us for the rest of this year and will be ongoing. Beyond that, it’s growing these premium brands in a beer market that is declining in the United States. Those are the headlines on what we’re focused on right now. — Sarah Johnson contributed to this article.