Latin CEO / May 2000
By Larry Luxner
This is certainly a difficult time to be in the beer business, concedes Francis Cressall.
As manager of corporate finance at Quilmes Industrial S.A. (Quinsa), Cressall is helping to guide the giant brewery through one of the most difficult periods in its history. Despite Quinsa's historic domination of the domestic beer business -- market share currently stands at around 70% -- the multinational is facing aggressive competition from cheaper brands at the same time Argentina struggles to climb out of a damaging recession.
"Because we're pegged to the dollar, recessions tend to be deep, and this recession is proving to be deeper and longer than we had expected," Cressall told Latin CEO. "The economy goes from one extreme to the other."
At present, Quinsa -- which employs 4,700 people -- manages 11 beer brands in Argentina: Quilmes, Heineken and various regional, specialty and lower-priced labels. It's also in the soft-drink business, having recently finalized the $80.6 million takeover of a 51.17% share of Buenos Aires Embotelladora S.A. (BAESA), a local Pepsi bottler.
In addition, Quinsa is in the process of renegotiating the sale of its wholly owned subsidiary, Paraguay Refrescos S.A., to Coca-Cola. It also owns a 49% stake in Eco de los Andes -- a leading mineral-water brand -- and has already begun distributing Perrier and San Pellegrino as well.
Yet Quinsa's core business is still beer, and that's where it's hurting the most.
In mid-March, Quinsa reported that for the 12 months ended Dec. 31, 1999, net income totaled $77.2 million (or 72.4˘ a share), down from $94.5 million (88.7˘ a share) in calendar year 1998.
Alexander Robarts, a Latin beverage analyst with Santander Investment in New York, says Quinsa -- which he calls an undervalued stock -- faces the "classic trade-off" of boosting market share slightly at the expense of profitability.
"I don't think focus on market share is the key in countries like Argentina, where you've got a strong dominant player and several strong competitors," he said. "The incremental cost of trying to get that one point of extra market share is usually not typically worth it. What is worth it is to focus efforts on trimming costs and becoming more surgical in where you do spend your marketing dollars."
Robarts adds that "Argentina is a very mature, segmented beer market, and as such you need to be very savvy in each of the channels and price points. I think Quilmes has done a very commendable job in basically getting into the trenches and maintaining profitability levels."
Simply put, Quinsa is a Luxembourg-based holding company that operates through its subsidiaries, principally Quilmes International Bermuda Ltd., in which it holds an 85% interest. The remaining 15% share is owned, since 1984, by Holland's Heineken Brouwerijen N.V. As part of this relationship, Heinken provides Quinsa with technical advice with regard to its brewing facilities and beer products.
Quinsa's predecessor business, Brasserie Argentine, was founded in 1888 in Paris by Otto Peter Bemberg, who established a brewery in the town of Quilmes, just south of Buenos Aires, in 1890. Except for the period between 1952 and 1960 -- when the govern-ment of Juan Perón confiscated the Bemberg family's Argentine assets -- the company has grown considerably. Quinsa established operations in Paraguay in 1932, expanding to Uruguay in 1965, to Chile in 1991, and to Bolivia in 1996. The Bemberg family still owns a controlling majority (50.01%) of the voting stock, or about 32% of the company.
According to Santander, the 30% of Argentina's beer market that Quinsa doesn't hold is split among CCU Argentina (13%); Brazil's Brahma (13%) and Isenbeck (4%). Robarts says the core of Quilmes' rivals "is not based in Argentina, so they can be occasionally aggressive" in going after market share. "People are not apt to penalize or reward the competitors based on their respective Argentine operations, they way they would with Quilmes."
Carlos Laboy, a beverage analyst at Bear Stearns, disagrees that Quilmes is undervalued.
"They keep losing market share, and profitability keeps declining," he said. "Any time you go from one monopoly to several competitors, there's going to be an impact. This is to be expected. There's absolutely no surprise on the street that market share has been declining and profitability is under pressure."
Laboy, noting that "They're under very intensive pressure in their home market, and whlie we like the acquisition of the BAESA soft-drinks business, it remains to be seen whether the turnaround of those operations will prove somewhat of a distraction to them, at a time when their competitors are intensely focused on the beer market."
He adds: "Quilmes has very well-heeled competitors, and they're being attacked from different angles with different strategies, and they're coming off a very high market share base, which makes them quite susceptible."
Also hurting Quinsa is the sluggish Argentine economy, which reduces the demand for beer. Consolidated revenues in calendar year 1999 fell 4% due to both lower unit prices and lower volumes as a result of Argentina's continued economic problems.
Cressall, 40, came to Quinsa two years ago from J.P. Morgan in 1997. Since his arrival at the company, the Argentine economy has contracted considerably, shrinking 3.7% in 1999 alone.
Nevertheless, in 1999 Quinsa managed to produce 11.7 million hectoliters of beer -- down from 11.8 million hectoliters the year before -- with Argentina accounting for 9 million of the total. The conglomerate also brews beer in Paraguay (1.5 million hectoliters in 1999); Bolivia (550,000); Uruguay (425,000) and Chile (360,000).
The best way to boost stagnant sales is via advertising, and Quilmes' logo can be seen throughout Buenos Aires -- from the backs of folding chairs at sidewalk cafes in the trendy neighborhood of Recoleta to the bleachers of River Plate Stadium. According to Cressall, 10.5% of the company's $820 million in 1999 revenues were spent on advertising and promotion.
Quinsa has also begun exporting beer to the United States and Europe, though on a limited scale. In the U.S., target markets are Florida and California, home to Argentine immigrant communities. Yet exports constitute less than 1% of total production at present.
"Geographic expansion is part of our strategy," he said. "But if we do expand, it'll be through acquiring an existing brewery, not starting a new one. That strategy has not worked very well in Latin America."
Cressall claims he's not too worried about the impending merger of Brazil's two biggest breweries, Antarctica and Brahma. If approved by the Brazilian government, the deal would create the world's third-largest brewery, AmBev, giving the new company a springboard from which to expand throughout Latin America.
"They're creating a monster, a vehicle for international expansion," he says, "but the merger won't affect us in the short term. We decided a couple of years ago against entering the Brazilian market."
The reason? Cressalle says it's very difficult to distribute beer in Brazil due to low prices and fierce competition, among other factors. "Brazil is a huge economy," he laments, "and the cost of mistakes could wipe us out."