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Quilmes, dominant in Argentina, seeks Latin expansion
Impact International / March 1, 1997

By Larry Luxner

BUENOS AIRES -- Just a few months ago, Quilmes Industrial S.A. (Quinsa) -- Argentina's leading brewery -- announced it would invest $48 million to enter the Bolivian beer market. Now it plans to spend $40 million on an 85% controlling interest in Cervecería Bieckert S.A.

In addition, the Buenos Aires newspaper El Cronista says Quinsa is negotiating the $60 million acquisition of a Peruvian Pepsi-Cola bottler, Cepsa, though the company's corporate finance manager, William R. Engels, says there's no truth to the report.

He did say Quinsa has agreed in principle to buy certain assets of Refrescos del Paraná S.A., Paraguay's sole Coca-Cola bottler, for around $9 million. As part of efforts to penetrate the southern Brazilian beer market, estimated at 8.0 million hectoliters a year, the company has also established Quilmes do Brasil Ltda., which will coordinate Quinsa's beer exports to that region from its breweries in Argentina, Paraguay and Uruguay.

"Cerveceria Bieckert is the oldest brewing company in Argentina and an important player in that market," the company said in a Dec. 10 statement. "Bieckert's sales volume reached 723,000 hectoliters with a market share of 6.5% in 1995. For 1996, Bieckert's share is anticipated to decline due to the intensive competitive pressures that prevail in Buenos Aires and its surrounding areas."

All this news coincides with the announcement that Quinsa's net sales for the first half of 1996 came to $378.5 million, up slightly from the $372.8 million recorded in the first half of 1995. Net profits, meanwhile, jumped 24.1% to $31.4 million (30 cents a share) from $25.3 million (24.7 cents per share) a year ago.

Quinsa's 1995 net sales came to $797.6 million, of which $632.2 million (79%) derived from beer sales, 14.1% from soft drinks, 4.1% from "malta" and 2.5% from mineral water. Geographically, Argentina represented $512.1 million (64%) in overall Quinsa sales, followed by Paraguay (22.8%), Uruguay (10%) and Chile (3.9%). In March 1996, Citibank N.A. established an American Depositary Receipt program for Quilmes, allowing U.S. investors to trade in Quilmes shares under the symbol "LQU" on the New York Stock Exchange.

"Our strategy is very simple," Engels told Impact International during a lengthy interview at Quinsa's corporate headquarters in Buenos Aires. "We are a beverage company with beer at its core. The three legs of our strategy are growth in established markets, related diversification and geographic expansion."

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 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, in Uruguay in 1965, in Chile at the end of 1991, and in Bolivia earlier this year.

In Argentina, Quinsa's market share during the first half of 1996 came to 73.8%, down from 74.4% for the second half of 1995 and 76.3% for the year 1995. Regionally, market share increased steadily in the greater Buenos Aires area, while it dropped elsewhere. According to the company, "this was attributable to our competitors' increased capabilities and their current deep discounting strategy which Quinsa believes will prove to be unsustainable over time."

Maybe so. But the real issue for Quinsa is that, after a century of unquestioned leadership, the company's domination of Argentina's $800 million-a-year beer market is now being challenged by new rivals, led by Brazil's Brahma and Germany's Warsteiner.

In December 1994, Brahma -- the world's fifth-largest beer manufacturer -- opened a $100 million brewery in Luján, near Buenos Aires, capable of producing 1.5 million hectoliters a year. The same month, Warsteiner inaugurated a $70 million plant at Zárate, also near Buenos Aires, to produce 1.2 million hectoliters a year of its Isenbeck brand beer. In addition, Compañía Cervecerías Unidas S.A. (CCU), the leading beer producer in Chile, has recently acquired two Argentine breweries -- Compañía Industrial Cervecera Salta S.A. and Cervecería Santa Fé S.A.

According to Engels, Brahma -- which had already set up a joint-venture malt processing plant, Maltería Pampa, in 1992 -- now enjoys a 4.5% market share throughout Argentina, though its share in Buenos Aires is around 8%. Engels added that Quinsa's advertising agency in Argentina is J. Walter Thompson, though he declined to say how much the company spends on promotion because of "competitive reasons."

Locally, Quinsa's brands include Quilmes Cristal, Bock, Andes, Norte and Palermo. Its newest brand, the non-alcoholic Liberty, sold 177,000 hectoliters last year and has a 99% market share. In Paraguay, Quinsa's Bremer, Pilsen, Tradicional, Pilsen Dorada and Baviera beer brands enjoy a 65% market share, while in Uruguay that share is 51%, in Bolivia 35% and in Chile 13%. All told, the company has five breweries in Argentina, two in Paraguay, one in Uruguay, one in Chile and two in Bolivia.

Recently, Quinsa announced it would invest $48 million to enter the 1.6 million-hectoliter beer market. Engels said the company's two brands, Ducal and Taquiña, are likely to enjoy a 35% share of the 1.6 million hectoliter local market once they're intro-duced to Bolivia, whose current beer consumption of 23 liters per-capita is among the lowest in South America and has plenty of room to grow. "We can really bring something to the table," he said. "Paraguay has been a very profitable business for us, and Bolivia has twice the population of Paraguay."

As part of its investment, Quinsa has acquired 54.6% of Incesa, a Bolivian holding company which owns 99.43% of Cervecería Santa Cruz (in the city of Santa Cruz de la Sierra) and 85% of Taquiña (in the city of Cochabamba). Outgoing shareholders, whom Engels declined to identify, will remain minority partners in Incesa. According to Engels, the two companies employ about 1,000 people. Santa Cruz has a technical capacity of 520,000 hectoliters a year, while Taquiña's annual capacity is 770,000 hectoliters.

Furthermore, Taquiña owns 50% of a brewery in Santa Cruz, with an additional capacity of 300,000 hectoliters; the other half is owned by third parties.

With an 85% market share in its franchise territories, Quinsa is also the leader in the Paraguayan soft-drink market; bottling and distribution of Coca-Cola products there generated $111.9 million last year. The rest of Quinsa's sales consists mainly of bottled water, set to increase with the launch of a mineral-water brand labeled "Eco de los Andes." Paraguay, said Engels, is the "fastest-growing beer market in Latin America," with annual growth there averaging 14.5% over the past five years.

Interestingly, per-capita beer consumption in Argentina stands at 34.5 liters, still lower than the country's 40 liters of per-capita wine consumption. But not that long ago, the average Argentine drank 90 liters of wine a year. Undoubtedly, heavy advertising by Quinsa has had a lot to do with the drop in wine consumption.

"Our efforts to create a young image for beer have pushed people to drink beer rather than wine," Engels explained. "We've been able to capitalize on the fact that people are drinking fewer alcoholic beverages than before. People don't drink for the sake of getting drunk."

Engels added that the company has invested $380 million since 1992 in "new capacity, restoration of old plants and other capital expenditures," and has managed to boost production while reducing its total workforce from 6,500 to the present 5,200.

Antonio Fovakis, manager of the Argentine Beer Industry Association in Buenos Aires, told Impact that Argentina's difficulties -- sparked by the 1994 Mexican peso crisis and the resulting "tequila effect" -- definitely hurt his members.

"The market is stable because of the tequila effect," he said. "We had a recession, and the beer manufacturers didn't escape it. Sales dropped. Now, we're recuperating."

Quinsa's chief executive, Norberto O. Morita, agrees with that assessment.

"The economic downturns which took place in Argentina, Paraguay and Uruguay have continued to hamper volumes and, as a result, affect operating margins during the first half of 1996," Morita said in a recent press statement.

"We anticipate that economic growth, one of the driving factors to strengthen demand for Quinsa's products, should resume in the second half of 1996 which, with a broadened product portfolio and strengthened competitive position, should fuel both volume and profit growth," he added. "We have begun to see signs of what we believe may prove to be the beginning of an economic recovery and we remain optimistic of the company's prospects throughout the rest of 1996 and beyond."

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