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Venezuela's Beer Market Is Hurt By a Shrinking Economy
Impact International / December 1, 1995

By Larry Luxner

CARACAS -- Watching the big American gas-guzzlers snake along Avenida Libertador, not far from Simon Bolívar's humble birthplace in downtown Caracas, it's hard to believe that this congested city of 5 million -- which boasts South America's most modern subway system, its largest hotel and its tallest skyscraper -- could be in trouble.

Yet Caracas is today the capital of the continent's only nation whose economy has actually shrunk this year -- though exactly by how much is anyone's guess.

"Under [ex-president] Carlos Andrés Pérez, we had a far better climate for businesses, no foreign-exchange or interest controls, and free trade at the borders," laments Donald DeVost, chief financial officer at Cervecería Polar, the country's biggest brewery. "Now all these things are gone. I don't see any change of policy until we have another foreign-exchange crisis."

Indeed, despite its petroleum wealth, Venezuela's 1995 gross domestic product is expected to drop for the third year in a row, and prices are now climbing by 70% a year. Thanks to runaway inflation, new 2,000-bolívar and 5,000-bolívar banknotes are already planned, according to Antonio Casas González, president of Venezuela's Central Bank. The 1,000-bolívar note -- the highest now in circulation -- is worth only $5.88 at current exchange rates.

Against that backdrop, it's no surprise the Venezuelan beer market is flat. What's new is the fact that Polar, the world's 19th largest brewer (according to the Association of Latin American Beer Producers), is getting some unexpected competition from Brazil's Companhia Cervejaria Brahma, the world's No. 5 brewer.

Brahma, acquired in 1989 by Brazil's Banco Garantia, has annual sales exceeding $2 billion. Early last year, it purchased a controlling interest in, and assumed administrative control of, Venezuela's Cervecería Nacional in the city of Barquisimeto, about 400 kilometers west of Caracas. Brahma invested $50 million in Nacional's shares, improving the Barquisimeto plant -- the only one since the Caracas plant was shut down -- and putting in a distribution network. This year, it invested an additional $40 million in "management operations," marketing and employee training, according to VenEconomía, a business magazine published in Caracas.

Distribution of Brahma Chopp began in the Venezuelan state of Lara, where the brewery is located. A recent study found that Brahma had conquered 25% of the Lara beer market in the three months leading up to December 1994. On Dec. 2, the beer was introduced in Caracas, in a lavish affair at the five-star Hotel Eurobuilding. The company has since canceled a distribution contract with Polar and set up its own network of independent contractors, almost all of which have come from Brazil. According to the article, Brahma has more than 250 delivery trucks at its disposal. Distributors have been established in Ciudad Bolívar and Maracay; the cities of Maracaibo, Mérida and Puerto Ordaz are still to come.

"Brahma could also make inroads in Zulia state by taking on Cervecería Regional, but Regional only holds 4% of the national market," according to VenEconomy. "Whatever the strategy, production should not be a limiting factor, as the Barquisimeto plant can produce over 200 million liters of beer per year, a figure company officials plan to double. At this point, all of Venezuela's Brahma Chopp is produced in the Barquisimeto plant."

Brahma itself aims to increase its market share from the current 6% to around 20% by 1998. Yet Polar's DeVost says his conglomerate, headquartered in the Caracas neighborhood of Los Cortijos de Lourdes, currently has a "solid" 90% of the Venezuelan beer market, with Maracaibo-based Regional claiming another 7% and Brahma's Nacional only 3%.

Regardless of the discrepancies, Venezuela's beer market is estimated at 16.5 million hectoliters a year, about 78 liters for each of the country's 21 million inhabitants.

"This per-capita consumption has remained constant even though the population has increased," DeVost said, adding that "we don't have the seasonal variety you'd find in Brazil or Argentina. We shoot up in December, around Christmas, and also in March and April, around Holy Week. In a normal month we sell 1.3 million hectoliters, compared to 1.8 million around Christmas."

DeVost, noting that Polar's profit margins "haven't suffered too much" in the current crisis, says his company sells one of the most economical beers in the world. A 12-ounce can of Polar currently costs 85 bolívares (50 cents at current exchange rates), while a 7-ounce bottle goes for only 45 bolívares (26 cents). Between 70% and 80% of Polar beer is consumed in returnable glass bottles, says DeVost. "We get as many as 35 trips out of a single bottle. We eventually have to destroy the bottles because they lose their appearance."

In addition to sales within Venezuela, Polar also exports to Dade County, Florida, "where we have a loyal following of Cubans," and to nearby Caribbean nations. DeVost claims Polar easily outsells Heineken in the Dutch-speaking islands of Aruba and Curaçao.

Yet he adds that "because of the economic crisis, all hard spirits have gone down, while beer has remained stagnant." Whisky is taking a particularly severe beating this season following the Caldera administration's decision to slash quotas on dollars assigned for whisky imports -- the first of a series of measures designed to cut imports of luxury items and boost Venezuela's shaky foreign reserves.

An official at the U.S. Embassy in Caracas says Venezuela's economy shrunk by 3.3% in 1994, after contracting by 1% in 1993. He expects 1995 to be flat, with some improvement beginning in 1996.

"The overall investment climate hasn't improved much at all since controls took effect," said the official, who asked not to be named. "We suspect that investment is down, though growth with Colombia has been quite substantial. There's also a fair amount of contraband trade with Colombia. On the border, you can get 230 bolívares to the dollar [compared to the official rate of 170 to the dollar]."

Yet while economists say purchasing power has easily shrunk 50% over the last 12 years, petroleum still accounts for 75% of Venezuela's foreign exchange and could be the engine to revitalize the Venezuelan economy.

In September, the Caldera government announced it would open the country's once-sacred petroleum sector to large-scale foreign investment. State-owned oil monopoly Petroleos de Venezuela S.A. will offer joint ventures in 10 highly prospective oil basins stretching from Lake Maracaibo in the west to Río Orinoco in the east. The 10 basins cover 4.5 million acres, and are all adjacent to currently producing fields. Though none have been explored carefully, together they are believed to contain between 7 billion and 40 billion barrels of crude oil. And that's just a fraction of the 64 billion barrels of proven reserves under the company's custodianship. Counting the 270 billion barrels of heavy oil in the Orinoco tar belt, Venezuela may actually have more oil than Saudi Arabia.

"The petroleum sector has engineered a complete reversal of its 1970s oil policy," says Donald Williams, president of Caracas Wireless Vision, who believes the economy has already touched bottom and is now heading for a rebound. "This will nearly double current reserves and production by the year 2005. The return of foreign oil companies to Venezuela means the start of significant economic growth."

And that's obviously good news for the beer industry.

"It all depends on economic policy," concludes DeVost. "If the government starts producing incentives, the beer market will grow faster than the overall economy. Venezuela has 15% unemployment. You put these people to work, and they'll become beer-drinkers."

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