When a stagnant European economy and picky consumers gave Heineken NV lemons, the world's third-largest brewer decided to mix them with beer.
The company this year rolled out a line of radler drinks, a blend of lemon soda and lager, to 23 markets in its biggest product introduction. It's venturing that the drink, sweeter and less alcoholic than beer, will win over the ever-elusive female drinker as well as young men who prefer wines or spirits.
Brewers are stepping up efforts to find alternatives to beer amid changing customer preferences. Market leader Anheuser-Busch InBev NV has produced a lime-flavoured variety of its Bud Light brand, while Heineken has added tequila to beer to create Desperados. Heineken is reducing its reliance on its eponymous global brand after six years of beer market declines in western Europe, to which it has a greater exposure than peers.
"Beer's losing out to other beverages," said Ian Shackleton, an analyst at Nomura in London. "You could argue that's because brewers haven't been as innovative. The question is: how do you innovate in lager? It's all a bit samey."
Radler is the cornerstone of Heineken's strategy to get six per cent of sales a year from new products. Last year, the company got 5.3 per cent of revenue from newly introduced drinks, or about euro 1 billion ($1.3 billion).
Declining volume
Heineken's journey to find the next big thing in beer has taken the company back almost a century. Invented in Germany in 1922 to cater to sportsmen seeking a halfway house between a beer and a soft drink, the radler gained popularity in the country and central Europe in bars and restaurants. Drinkers may also have tried a similar tipple by asking for a panache in Paris, or a shandy in a British pub.
"Heineken's formalised what was being mixed by a barman," said Trevor Stirling, an analyst at Sanford C Bernstein in London, referring to a drink that contains about equal quantities of beer and soda. "Consumers love it, so I don't know why someone didn't give it to them beforehand."
Radler drinks had a "very strong" performance in the first half of the year, Francois-Xavier Mahot, senior director for global innovation at Amsterdam-based Heineken, said June 28. That's just as well: Heineken will on Wednesday report a 6.6 per cent decline in first-half beer volume in Western Europe, according to the median estimate of four analysts surveyed by Bloomberg.
Heineken shares fell 54 cents, or one per cent, to euro 55.29 at 2:20 pm in Amsterdam on Tuesday. The stock has gained about 9.5 per cent this year, broadly the same as peers.
Traditional mixes
New products such as Anheuser-Busch InBev's Bud Light Lime Lime-A-Rita and Platinum, which have helped boost Bud Light's market share in the US, show consumers are keen for a new skew on beer. Heineken's Desperados increased sales 15 per cent in 2012 compared with 5.3 per cent growth for the Heineken brand.
Heineken's been rolling out radler in countries from the UK to the Democratic Republic of Congo. It's not alone, as Carlsberg A/S and SABMiller Plc are also pushing lemon-and-beer drinks, though Heineken says it's leading the pack. Without divulging internal data, Mahot said Heineken's new radlers are outperforming traditional beer mixes and lagers across Europe.
A heat wave in July may have helped the drink gain traction - radler sales are more skewed to hot weather, when drinkers seek a more thirst-quenching beverage, Mahot said.
While the drink's packaging and advertising isn't skewed toward either gender - the advertising shoutline is "doubly refreshing" - Mahot says more women are gravitating toward it, enticed by the sweeter citrus taste. Women are the "holy grail for brewers" seeking to reinvigorate interest in beer, he said.
Lower strength
Cutting beer with lemon reduces the strength of the drink - the Foster's-branded radler produced by Heineken in the UK contains just two per cent alcohol by volume - and may appeal as a drink for consumption after sporting activities, Mahot said. That sets radlers aside from other citrus-flavoured beer drinks.
Low-alcohol drinks are also profit-boosting for brewers, who pay less tax on them than for stronger brands. Heineken's radlers can cost as much as 20 per cent more than straight beer.
Heineken could use a boost. The company's shares trade at 18.5 times analysts' estimates of full-year earnings, less than SABMiller's 18.9 times and AB InBev's 20.3 times. Heineken may report a two per cent decline in operating profit and a three per cent drop in organic consolidated beer volume in the first half of the year, according to median estimates in an analyst survey.
Even if radlers don't have staying power when winter comes to Europe, brewers have to take a chance with new products, according to John Philips, a drinks-industry consultant who's held management roles at Foster's Group Ltd and Diageo Plc.
"Unless you innovate, you're not going to grow your business," Philips said.
