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Mexican Beer Market - Essay Example

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The author of the paper "Mexican Beer Market" will begin with the statement that many things come to mind when associating beer with Mexico.  Tropical beaches, blazing sunshine, and even gorgeous sunsets to name a few.  There is a lengthy history of beer in Mexico. …
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Mexican Beer Market
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Analysis of Mexican Beer Market History of Mexican Beer Many things come to mind when associating beer with Mexico. Tropical beaches, blazing sunshine, and even gorgeous sunsets to name a few. There is a lengthy history of beer in Mexico. During early civilization the native Aztec and Mayan people brewed alcoholic beverages primarily from maize. Some of their libations were fermented from honey water and agave plants. During the middle of the 19th century our European counterparts were instrumental in cementing the art of brewing in Mexico. Many Germans immigrated here and had a very strong influence on the taste of beer. During the four year Austrian rule, lager beers and Pilsners were the beverage of choice. As a result, Negra Modelo and Dos Equis- two of the more popular Mexican beers-have a darker color and a heavier malt taste than some of the more common Mexican beers today. The immigrants of Swiss and Germanic backgrounds contributed to much of the earlier development in the brewing industry. The first lager brewery was opened in 1845 and the first cerveceria was opened in 1865-both by Swiss men. These were modest operations but by 1890, a substantial, industrial brewing facility was built in Monterrey. Another followed four years later in Orizaba. The Mexican beer business received a substantial shot in the arm during the 1920's Prohibition period in the United States. Even more breweries opened as Americans converged to the border cities to purchase and consume alcohol. The Mexican beer market has really thrived since that era. History, Analysis, and Evaluation of FEMSA FEMSA is one of the most dominant breweries in Mexico. They were founded in 1890 in Monterrey. They continue to work to be a world class organization that generates value through a customer focused business system. Currently they have: 6 brewing facilities in Mexico 8 brewing facilities in Brazil Over 23,000 employees Served approximately 320,000 retail stores in Mexico Annual growth rate of approximately 1,000,000 people The largest beverage company in Latin America serving more than 184 million consumers FEMSA's beverage operations include: *Coca Cola FEMSA which is the largest Coca Cola bottler in Latin America and the 2nd largest in the world based on sales volume. Fanta, Sprite, and Ciel are a few of more than 70 brands offered *FEMSA Cerveza is one of Mexico's leading brewers and major exporter to the U.S. The flagship brands include Sol, Dos Equis, Tecate, and Bohemia. *Oxxo convenience stores are the largest retail network in Latin America with over 4,800 stores in Mexico FEMSA Financial Track Record for 2006: Total Revenue = $11,625 million Oxxo Stores 28% Beer 28% Soft Drinks 44% CAGR 16% Total Operating Income =$1,599 million Oxxo Stores 9% Beer 35% Soft Drinks 56% CAGR 15% FEMSA 1st and 2nd Quarter Reviews FEMSA has done pretty well for the 1st quarter of the year. They experienced a revenue growth 9%. The breakdown of growth is 7% Coca Cola sales, 3.6% beer sales, and 10.8% income from operations. International operations doubled from 2006 creating the strongest growth. The least amount of growth in the beer division was caused by several factors: Seasonal increases of expenses such as marketing and raw materials in Brazil; A softer demand environment in Mexico; and a weaker pricing environment. During the 2nd quarter of 2007, FEMSA experienced a slight decrease in financial gain with a 7% revenue growth. Coca Cola sales increased 5.9%, beer sales increased 2.7% and income from operations increased 10.5%. Once again the strongest growth comes from international operations. The revenue reports from the first two quarters of 2007 are very favorable to a steady overall growth rate. While FEMSA has had marginal increases in revenue, they are focused on long term results over short term results. Mexico is FEMSA's largest market by far when factoring sales and profits. Their consumer base is large with approximately 40% under the age of 20. Brazil has a very similar demographic base. The United States market has the most lucrative beer market in the world. Not only is there steady growth rate profit wise, but the import segment is expanding as well. Of course the three main markets are Mexico, Brazil, and United States but FEMSA is existant in 7 countries outside of the top three. They are located in Argentina, Columbia, Venezuela, Guatemala, Nicaragua, Panama, and Costa Rica. Financial Outlook on FEMSA FEMSA has a very strong philosophy and that is to encourage and satiate consumer demands and to sustain a solid shareholder value. Some of the long term goals include: Doubling business value every five years, generating a significant percentage of revenues from the overseas markets and currencies, providing shareholders an appealing rate of return on their investment, and help make contributions to social development. With this kind of drive and determination, the end result is a system that provides exceptional service to consumers, creates value for shareholders, and provides enrichment for the communities served. Based on their revenues in 2006 and thus far in 2007, they will continue to be a tremendous force to be reckoned with in North America and Latin America. History, Evaluation and Analysis of Grupo Modelo Grupo Modelo is the current forerunner in Mexico in the production, distribution, and marketing of beer. They have 63.2% of the total market share in both domestic and export beer at the end of 2006. They were founded in 1925 and currently brew and distribute twelve brands of beer all over the world. Some of the more popular brands include Victoria, Pacifico, Negra Modelo, and the most popular beer sold in the world, Corona. Grupo Modelo's command over the market is not simply happenstance. They have evolved from a local beer maker to the leading brewing group in Mexico through a commitment to excellence. They currently export five brands with distribution in one hundred and fifty different countries. In Mexico, they exclusively import beers produced by Anheuser-Busch such as Budweiser, Bud Light, and O'Doul's. Recently Grupo Modelo has dipped their finger into the bottled water market. It includes the distribution of Santa Maria, Pellegrino, Perrier, and Acqua Panna among many others. 2006 End of Year Financial Summary Grupo Modelo's financial summary at the end of 2006 showed extremely strong growth in all economic areas. Domestic volume grew 15.2% and exports grew 15.7%. Operating profit increased 13.4% as the margin expanded 80 bp. Compared to 2005 total beer volume rose 8.3% and beer volume sold abroad increased 15.7% representing 32.2% of total volume, and their import brand portfolio grew 26.9%. Grupo Modelo's capital expenditures included funding expansion projects within the organization. Almost 4,500 million pesos were invested, 58.4% of which used for modernizing breweries and 41.6% into sales. Net majority income also increased 14.3% in the year. Earnings per share totaled 2.7 pesos in which the EPS in 2005 was 2.3 pesos. 1st Quarter Financial Review Domestic volume grew 4.5% and net sales increased 24.2%. For this past January 2007 the volume and sales of beer in the domestic market include the imported brand portfolio. This is due to the fact that Grupo Modelo will consolidate their financial statements with that of Crown Imports, LLC. At the close of the first quarter of 2007 these results totaled net sales of 549 million. dollars and an operating profit of 116 million dollars. Both figures are comparable to the growth experienced in 2006. Operating expenses and cost of goods sold increased due to this recent merging with Crown Imports. OE increased 24.8% and COGS increased 22.5%. Storage and distribution costs as well as advertising expenses were incurred therefore increasing the operating margin. Depreciation and Amortization represented 4.9% of the net sales. EBITDA (Operating Income + Depreciation - Equity Income) was increased by 25.2% over the rate of the previous year. However, the comprehensive cost of financing was positive due to the reduction in monetary position and exchange gain during this period. Also, the other expenses and income show a gain of 800 million pesos compared to a loss of 66 million pesos in 2006. This figure includes a 592 million pesos gain because of liquidation of an advertising fund that was part of the import contract ending December 31, 2006. The quarterly EPS was .74 pesos which is higher than the .61 pesos that was registered at the end of 2006. Financial Outlook on Grupo Modelo As of December 31, 2006 Grupo Modelo's financial position held very strong and their capital remained debt-free. The only short term operational liabilities equaled the amount of 6,198 million pesos. The majority stockholders equity totaled just under 59,000 million pesos which meant a 7.9% increase compared to 2005. Their merger with Crown Imports, LLC during the first quarter of 2007 resulted in them having to incur some extra operating expenses and cost of goods sold. This consolidation of their finances with Crown Imports will be to their benefit in the long run since their net majority income rose over 20% from last year. Agreements Among Beer Conglomerates There are all kinds of negotiations between governments and beer producing establishments. In some cases, trade and foreign investment will not always rely upon companies exporting goods or building facilities in foreign countries. It is best for a company overseas to purchase a local firm and this is the case with many beer companies. Most consumers prefer to drink beer from a local company rather than one from a foreign country. So instead of incurring the cost of exporting goods, most foreign firms will form an association with a local brewery. This way the name of the local outfit can remain the same so customers will never know about a change in ownership. On May 4, 1994 a Memorandum of Understanding (MOU) was signed as an agreement between the United States and Canada. In Canada, provincial liquor boards have control over import distribution and sale of alcoholic beverages in their respective province. They place heavy fees and restrictions on imported beer. This distressed beer producers in the U.S. because they were unable to access and compete in a Canadian market. Many complaints were filed and the U.S. Government confronted Canadian liquor board practices before the General Agreement on Tariffs and Trade (GATT) board. After many negotiations the MOU granted more access to the Canadian markets for U.S. beer companies. As a result of U.S. efforts to have access to Canadian beer markets, Canada decided to fight back by scrutinizing U.S. tax and distribution laws. They came into question and Canada claimed that they were contradictory with GATT. They imposed a 50% duty on imported beer. Eventually, after several more rounds of negotiations, these duties were abolished and a final MOU was concluded. This is a great example of how foreign pricing and tax policies can hamper efforts of fair competition in many markets. Anheuser Busch, Miller, and Coors were all exempt from the exorbitant duty in Canada because they had licensing and distribution agreements with major Canadian breweries. It certainly pays to have alliances with large-scale breweries worldwide. There was one particular issue back in April of 1998 between the Mexican Government and Miller Brewing Company with remains a mystery to this day. The Mexican Government closed its border to all Miller products for five weeks over the duration of Cinco De Mayo. Complexity over labeling requirements was said to be the issue though it was never fully explained by Mexican authorities. This provoked a trade disagreement through NAFTA but no clear explanations ever seemed to be demanded. When this occurred, Miller Brewing Co. was never notified in advance, the trucks were simply turned away at the border. Miller believes there were never true concerns about their labeling and certification standards but that Mexico was protecting FEMSA and Grupo Modelo. Up until April 1998 Miller had enjoyed a 50% rise in sales in Mexico allowing them to capture 1% of the Mexican beer market. Their gain in market share allowed Miller Brewing to become Mexico's largest beer importer. Many in the media believe that this success caused Mexico to protect their own beer industry by claiming new labeling standards. U.S. Commerce Secretary Bill Daley intervened and both US and Mexican Governments claimed that NAFTA would solve the problem. NAFTA would seem to be the solution as they are here to diminish protectionist actions like this. However, NAFTA was never officially involved and this dispute was resolved through back-door negotiations amongst the Mexican and U.S. Government and Miller Brewing Co. Anti Trust Scandals Back in January of 2000 is when the probing began. The former incident of Mexico's attempt to ban Miller Brewing from having a strong presence in their country was a precursor to an anti trust scandal as well. After FEMSA and Grupo Modelo had nearly identical increases in their domestic beer prices within a day of one another, the Mexican Federal Competition Commission (CFC) kicked off an investigation. Ordinarily both organizations raise prices by the same amount each year. Authorities in this case were interested in the fact that the price increases were duplicated in a one day time frame. Also, the inflation forecast for 2000 was about 10-11%. FEMSA announced they will hike their prices by 14-16% while Modelo announced they would hike theirs by an average of 16%. This anomaly of beer price increases never amounted to an indictment back in 2000. But in late summer of 2004 that changed. FEMSA and Grupo Modelo were being investigated by anti-trust regulators who believed a secret cartel had been established. The definition of a cartel is a syndicate who share a common business interest. Secret cartels formed between two or more competitors in an effort to: fix prices, restrict output, share markets, and limit competition are illegal. Because Mexico's market is dominated by the two brewers FEMSA and Grupo Modelo, they are likely to be under an intense amount of scrutiny. After the incident of Miller Brewing Co. being locked out at the border in 1998 and a minor probe for identical price hiking in 2000, these two conglomerates have been flagged. The CFC has investigated whether actions, contracts, or agreements have blocked competitors access and have forced them out of the market. The plaintiff in this probe has not been named by the CFC stating it is a foreign brewer with a limited presence in Mexico. However, it is widely suspected to be Miller Brewing Co. Certain actions by brewing companies are perfectly legal in a competitive marketplace. For instance, brewers are allowed to help smaller retailers acquire the proper licenses to sell alcohol. In return for an exclusive sales agreement they will offer to provide signs and/or refrigerators. Mexico's antitrust agency is trying to loosen the noose of large industries not only in beer production but in the television, bread, cement, etcindustries as well. Only a select few have complete domination in the marketplace leaving little room for others to break in. Last year, Grupo Modelo was ordered to pay a fine for impeding the investigation into their suspected cartel activities. They refused to hand over any information on prices, sales volumes, or their exclusive contracts with retailers. Modelo was thought to have targeted small establishments and corner markets and creating unfair contracts that prevented them from selling their rivals beer. The investigation was closed due to lack of evidence. There ended up being no action taken by the CFC as of late but could re-open probe at any time should new evidence ever surface. Summary of Mexico's Beer Industry We know Mexico has a long history in beer production and covers markets worldwide. It is the eighth largest in the world. Grupo Modelo and FEMSA domianate this market selling over 99% of the beer that Mexicans drink. After a glance at each and every financial summary over the past couple of years it is easy to see why these two conglomerates offer attractive returns on investments for shareholders. Stability and growth are assets that would entice even the most careful of investors and FEMSA and Modelo have both. With only a few minor setbacks pertaining to short term costs, the long term goals are firmly set in place. Both companies have a promising future, are financially sound, and would be a great investment for the future. The antitrust scandal has had a minor effect on the cost of shares on the Mexican stock exchange. As long as the CFC does not uncover unscrupulous activity by either organization, FEMSA and Grupo Modelo are poised for long lasting supremacy in the Mexican beer market. Works Cited FEMSA. 19 September 2007. Our Business is Beverages. 19 September 2007. Grupo Modelo. 19 September 2007. Full Year 2006 Results. 19 September 2007. Murphy, Helen. Cola war erupts in Mexico, Corporate Finance, May 1993, pp. 6-7. Irvin, I.J.; Sims, W.A.; Anastasopoulus, A., Interprovincial Versus International Free Trade: The Brewing Industry, Canadian Journal of Economics, v. 23, May, 1990, p. 332-347. Farnsworth, C. "U.S.-Canada Rift Grows Over Trade, " The New York Times, February 18, 1992. Austen, Ian, "Cross Border Trade: Canada Accuses U.S. of Imposing 47 Import Barriers, "The Ottowa Citizen, May 2, 1992. United States/Canada: Importation, Distribution and Sales of Certain Alcoholic Drinks by Provencial Marketing Agencies, GATT Activities Report 1992, p. 44-46 United States/Canada: Importation, Distribution and Sales of Certain Alcoholic Drinks by Provencial Marketing Agencies, GATT Activities Report 1993, p. 52 Stebe, A. Michael, The Issue. American University, School of International Service. May 5, 1999. Read More
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