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Quilmes Loses Market Share Amid Poor Economy, Pricing
Impact International / March 1, 2000

By Larry Luxner

BUENOS AIRES -- 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 one of Argentina's worst recessions in recent memory. Despite his company's historic domination of the domestic beer business -- market share currently stands at 70.8% -- the Buenos Aires-based multinational is gradually losing ground to cheaper brands.

In mid-November, Quilmes reported that for the three months ended Sep. 30, 1999, net income totaled $15.6 million (or 14.6˘ a share), down from $18.1 million (17˘ a share) in the same period in 1998. For the first nine months of 1999, net income came to $52.4 million, down sharply from the $60.9 million Quilmes earned in the year-ago period.

The chief reason, says Cressall, is a 5.8% drop in beer sales this quarter -- a victim of both lower unit prices and sharply lower volumes as a result of Argentina's continued economic problems.

"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."

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 government 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 (50.06%) of the voting stock, or about 35% of the company.

Cressall, 40, came to Quinsa nearly two years ago from J.P. Morgan in 1997, Since then, the Argentine economy has contracted considerably, shrinking 3.7% in 1999 alone. Nevertheless, in 1998 Quinsa managed to produce 11.8 million hectoliters of beer, with Argentina accounting for 9 million of the total. The conglomerate also brews beer in Paraguay (1.4 million hectoliters in 1998); Bolivia (600,000); Uruguay (400,000) and Chile (300,000).

At present, Quinsa manages 11 beer brands in Argentina: Quilmes, Heineken and various regional, lower-priced labels. It's also in the soft-drink business, having recently finalized the takeover of Buenos Aires Embotelladora S.A., a local Pepsi bottler, and 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 will soon start distributing Perrier and San Pellegrino as well.

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 Brahma and Chile's CCU, the local Budweiser bottler.

According to a company statement issued Nov. 18, "Argentina's difficult economic environment showed no signs of improvement during the third quarter. Furthermore, significant price discounting introduced by some breweries during the first quarter of 1999, particularly in the one-way segment of the market, continued throughout the quarter."

Domestic volume sales of beer during 3Q 1999 declined 2% to 1.75 million hectoliters, compared to 1998. Market share for the quarter was 70.2%, compared to 69.8% in 2Q 1999, in what Quinsa calls "a satisfactory development in light of the prevalent price aggressiveness and GDP contraction." Sales were $103.3 million in 3Q 1999, compared to $112.0 million a year earlier. The absence of mineral water sales during the quarter (they are no longer consolidated) accounted for $5.0 million of the difference. "The balance was due principally to a 3.4% decline in average pricing and to lower beer volumes sold," says Quinsa. "Average pricing was lower as a consequence of both the repositioning of the company's can presentations and a higher mix of low-priced brands in total volumes sold."

The best 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. According to Cressall, 11% of the company's $850 million in 1998 revenues were spent on advertising and promotion.

A few months ago, Quinsa inaugurated a new $26 million bottling plant in Tucumán, in northwestern Argentina. The new facility allowed Quinsa to close its old brewery, "inmproving the cost structure while ensuring the highest quality standard for its production."

Elsewhere in South America, Quinsa's recent success has been mixed. In Bolivia, domestic volume sales for 3Q 1999 came to 132,000 hectoliters, down from 159,000 hectoliters in the year-ago period. Sales for the quarter were $7.5 million, down from $9.7 million a year earlier.

In Chile, domestic beer volume sales were flat at 60,000 hectoliters for the third quarters of both 1999 and 1998, despite a 7.5% decline in total market volumes. Quinsa's market share edged up from 7.5% to 8.2%, though sales dropped from $5.5 million to $4.5 million due to lower exports and lower average pricing.

In Paraguay, domestic beer volumes jumped 17.2% in 3Q 1999 to 313,000 hectoliters. Quinsa's market share has continued to rise, reaching 78.8% (up from 70.2% in the year-ago quarter), supported by the strength of its local Pilsen brand and by the growth of the Quilmes brand. Total beer sales came to $16.9 million for the third quarter, up from $15.6 million a year ago.

In Uruguay, beer market volumes declined 15.6% quarter-on-quarter, "affected by a recessionary economic environment." Quinsa's domestic beer volume sales were 65,000 hectoliters, and market share was flat compared to 3Q 1998. Sales came to $9 million, down dramatically from the $15 million recorded in 3Q in 1998. This was the result of malt sales and lower beer volumes. Operating profit came to only $100,000, compared to $1.1 million a year earlier -- "due to the decline in sales that more than offset labor cost savings and lower advertising expenses," says the company.

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. Importers include Alta Marketing of San Diego; Haralambos Beverages of Los Angeles; Beverage Link of Miami and John Taylor of Orlando. 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 for us 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, fierce competition and an unjust tax system. "Brazil is a huge economy," he laments, "and the cost of mistakes could wipe us out."

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