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Latin Beer Markets Go for the Gusto
Global Finance / February 2001

By Larry Luxner

Latin America's three most populous nations -- Argentina, Brazil and Mexico -- also happen to be the region's biggest beer-guzzlers, together accounting for over 90% of the suds drunk south of the Rio Grande.

Yet outside of Mexico, where the economy grew a healthy 6% last year, and Chile, which is beginning to bounce back, uncertainty plagues the region. Argentina is suffering through one of its worst recessions in recent times, which has clearly hurt beer sales there. Smaller markets like Colombia, Ecuador, Peru and Venezuela aren't doing much better.

Meanwhile, beer executives are keeping a close watch on Brazil, where a recent merger between former rivals Antarctica and Brahma is driving down consumer prices while unexpectedly giving Canada's Molson its first real presence in Latin America's top market.

Here's a look at developments in the region's most important countries:

HARD TIMES IN ARGENTINA

This certainly isn't a good time to be in the beer business, admits Francis Cressall.

As corporate finance manager at Quilmes Industrial S.A. (Quinsa), Cressall is trying to guide the giant brewery through a prolonged recession. Despite his company's historic domination of the domestic beer business, the Buenos Aires-based multinational is gradually losing ground to cheaper brands.

"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," said Cressall. "So we'll have a slight drop from last year. We go from one extreme to the other."

At present, Quinsa manages 11 beer brands in Argentina: Quilmes, Heineken and various regional, lower-priced labels. It also sells soft drinks and mineral water, yet Quinsa's core business is still beer, and despite the rapid growth in Argentina of foreign giants like Wal-Mart and Carrefour, hypermarkets account for only 10% of Quinsa's sales; most beer is still sold through traditional mom-and-pop stores.

In the last few years, market share has declined from 78% to 70%, with the remaining 30% split between Brazil's AmBev and Chile's CCU, which last month [January 2001] sold 16% of its stock to Anheuser-Busch.

One way to boost stagnant sales is via advertising, and Quinsa's 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.

In addition to extensive operations in Bolivia, Chile, Paraguay and Uruguay, Quinsa has begun exporting beer to the United States and Europe, though on a limited scale.

"Geographic expansion is part of our strategy," said Cressall. "But if we do expand, it'll be through acquiring an existing brewery, not starting a new one. That strategy has not worked for us very well in Latin America."

MERGER-MANIA IN BRAZIL

American Beverage Co. (AmBev), with a market capitalization of $8.1 billion, now owns three of the top 15 beer brands in the world -- Brahma Chopp, Skol and Antarctica Pilsen. Together, they command a 69% share of the Brazilian beer market, which in 2000 was estimated at 82 million hectoliters.

Yet AmBev hasn't had an easy time winning over skeptics who challenged the 1998 merger between Antarctica and Brahma.

"I think it's bad for the consumer," says Peter Carl Armstrong, a Rio de Janeiro-based independent beverage marketing consultant. "Brahma and Antarctica got away with forming this merger, which obviously constitutes a monopoly. It's put the other breweries in a difficult situation."

Nevertheless, a new report by Santander Central Hispano suggests that "the Brazilian consumer will most benefit from the new competitive landscape spawned by the merger." It points out that AmBev's mainstream brands, excluding Bavaria, have lost 17.7 percentage points of share since 1991, and that the trend will continue -- particularly if Heineken takes a majority stake in Kaiser, and decides to make its Pilsen brand a mainstream brand.

Under the conditions set forth by Brazilian anti-trust agency CADE -- which approved the sale -- AmBev had to sell as a package five plants located in each of the five strategic regions of Brazil, as well as its Bavaria brand. Late last year, Canada's Molson won the auction to buy those plants, paying approximately $200 million. The deal also gives Molson access to part of AmBev's distribution network for the next four years.

"The competitive landscape of the Brazilian beer industry in 2001 will be very different than in 2000," says Santander beverage analyst Alexander Robarts. "First, because you've got one new international player, Molson. Secondly, there's a renewed financial and strategic focus on Brazil by Heineken, and third, the discount brands -- led by Schincariol -- continue to cause pricing pressures as they increase their market share."

All told, the synergy created by the AmBev merger will lead to over $300 million in savings over the 2000-01 period; 50% of those savings will be in production, 29% in distribution and administration, 17% in financial synergies and 4% in other categories.

Robert H. Blocker, a São Paulo investment broker who specializes in M&As, says AmBev is the only Brazilian company with an important position in world markets, and the critical mass to make a difference.

"It'll now be easier for them to make the investments they need to keep up with the beer market, which is growing dramatically," Blocker said. "Even with a slow economy, the market for beer has been growing fast. If the Brazilian economy grows by 5%, beer will grow 10%."

OTRA CORONA, POR FAVOR

The booming Mexican economy and continued strong U.S. demand for Corona Extra bodes well for Grupo Modelo, Mexico's leading beer producer.

During the first nine months of 2000, Grupo Modelo's total beer shipments reached 27.6 million hectoliters, a 6.4% increase over the year-ago period. Net export revenues for 2000 were $554 million, a 16.4% growth over 1999 figures. This amount is the highest ever registered for any January-September period, says the company.

Meanwhile, Corona Extra continues to rank as the world's 5th-largest beer brand, trailing only Budweiser, Bud Light, Brazil's Brahma Chopp and Japan's Asahi Super Dry. The brand is already by far the most popular of 450 labels imported into the United States, and is well ahead of Heineken, the No. 2 import.

"In the U.S. market, we continue to be very satisfied with the results we're getting, taking into account that in the last four years, we've seen an average growth of 30% annually," said Valentin Diez, senior vice-president and CEO of sales and marketing at Grupo Modelo, which is 50.2% owned by Anheuser-Busch.

Modelo's current market value is $8.5 billion -- a number that's likely to keep on rising, given that Mexico is one of the few Latin countries whose GDP grew significantly in 2000. In addition, because of NAFTA, the Mexican economy is closely linked to the U.S. economy, which has also enjoyed strong growth.

"NAFTA has favored not only beers but all Mexican products," said Diez. "It has facilitatted the free trade of merchandise between both countries. It has been very positive for the great majority of products."

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