USA &Mexico: American beer drinkers shift to Mexican beers which have over 50% of the import market share

Millions of Americans seeking an alternative to domestic brews are increasingly drinking beer imported from Mexico. This trend, combined with new ways of distributing and marketing products, is boosting results for Mexican brewers and helping them to slowly but consistently swallow more of domestic companies' market share, analysts say, MarketWatch released August 10.

Fomento Economico Mexicano S.A., the maker of Tecate and Dos Equis, reported a 42% jump in its export volume in the first quarter of 2006 on the back of strong U.S. sales. That means the brewer exported more than 17 million gallons of beer, up from 12 million gallons. In the second quarter, exports dropped 0.5% due to the distribution of a buildup of inventory from the previous quarter, the company said.

Exports from Mexico's other beer giant, Corona maker Grupo Modelo S.A., climbed 20.5% in the first quarter and 7.8% in the second.

In contrast, domestic volumes at the biggest American brewers, Anheuser-Busch Cos. and Molson Coors Brewing Co. grew by less than 5% in the first quarter. In the second quarter, Anheuser-Busch's domestic beer volume rose 2.2%. The St. Louis-based brewer owns 50% of Grupo Modelo. The shift of many American beer drinkers toward imports is a reflection of a growing and relatively stable economy, and 'certainly not a short-term trend.'

So with imported-beer sales growing at a brisk pace while the share among the domestics shrinks, the makeup of the U.S. beer market could radically change in some years. The shift of many American beer drinkers toward imports is a reflection of a growing and relatively stable economy, according to Mark Swartzberg, beer market analyst at Stifel Nicolaus. Despite signs of a slowdown in coming quarters, he expects imports to continue eroding domestic brewers' market share.

"It's certainly not a short-term trend," said Swartzberg.

With more than 90% of the Mexican beer market in their hands, Grupo Modelo and Femsa, Mexico's two biggest brewers, are looking north to expand their revenues, sending more than 80% of their exports here.

"Mexican brewers had focused on the south [of the United States] and now they are looking to encompass more territory," said Luis Martinez, Latin America beverage-sector analyst at Standard and Poor's in Mexico City.

To be sure, Grupo Modelo's and Femsa's beer sales are dwarfed by those of domestic companies such as Anheuser-Busch and Molson, which account for 86% of the beer sold in supermarkets and convenience stores in the United States, AC Nielsen data show. But so far, imports have escaped the fate of domestic brewers, which have seen their sales fall as wine or spirits become more popular.

In 2005, overall beer shipments from manufacturers to wholesalers dropped 0.1%, with shipments for domestic beers falling 1.2%, according to the Beer Institute, an association of brewers that compiles beer statistics. During the same period, imports grew 7.2%.

This year, shipments of domestic beer rose 3.8% in the first quarter, although mainly due to the dismal comparison with last year, analysts said. Shipments of imported beer grew 10% in the first couple of months of 2006, the Beer Institute reports.

With slightly more than 50% of the import market share, Mexican brewers are largely responsible for driving growth. Supermarket and convenience-store sales of Mexican beers expanded by 11% last year, compared with a 7.6% rise in overall imports, according to AC Nielsen data.

In addition, Mexican beers in particular have benefited from an increasing appetite for Mexican food, said Dan Motelet, beer expert at AC Nielsen. Mexican restaurant sales went up 23% between 1997 and 2002, according to the latest figures from the U.S. Census Bureau. Mexican beers are also light in color and taste, appealing to Americans more than other imported beers, he commented.

Recently, though, Mexican brewers have been growing their market share simply by putting theirs beers in more selling points, analysts pointed out.

In January 2005, Femsa switched distributors in the United States, replacing InBev SA's American subsidiary Labatt USA LLC with Heineken USA, a unit of Dutch brewer Heineken NV. The move has increased sales, even though it slowed them at first, company executives said.

The impressive 46% jump in exports in the first quarter of 2006 was partly due to a bad comparison with the same period last year, but it was also a result of higher sales due to the deal with Heineken, Femsa Chief Financial Officer Javier Astaburuaga asserted in a conference call with analysts earlier in the year.

"Today they cover more sales points, especially in the Northeast and East," said Rafael Shin, analyst at Credit Suisse. "Before they had a presence, but it was mostly in the West Coast."
Modelo also has rethought its distribution model. The company recently formed a joint-venture with Constellation Brands Inc. to distribute and market its beer in the United States.
Constellation's division Barton Beers currently distributes Modelo's beers in the western states, but starting next year it will take over the eastern territory now managed by Texas-based Gambrinus Co. The company and UBS also expect the deal to bolster Modelo's earnings.


"Modelo negotiated the price with Gambrinus when Corona was nothing," said Credit Suisse's Shin. "Now that it's the leader brand, it has a lot more space to negotiate a contract."

Offering many brands is also helping Femsa and Modelo make more sales. While other foreign brewers sell only a couple of their brands in the United States, Femsa and Modelo offer five each and promote them within different communities.

"Mexican breweries have focused on reaching all types of consumers with different products: premium products, low-price products. ... Now the results are really starting to show," said Standard and Poor's Martinez.

For example, Femsa uses Tecate, a popular beer in Mexico, to reach first-generation immigrants between 21 and 34 from that country, according to Don Blaustein, vice president of sales at Heineken USA, Femsa's U.S. distributor.

In one of the brand's TV commercials, two Mexican immigrants looking for a good time are disappointed with the hip-hop and square dancing at the bars they visit. Then they discover a group of Spanish speakers buying Tecate at a convenience store and follow them to a house party. "Bienvenido a Casa," says the ad. Welcome home.

Dos Equis, on the other hand, targets a more multicultural audience with higher purchasing power, said Blaustein. The brand has associated itself with flashy border art and culture. Its "Cinco de Mayo" party featured "models with full-body tribal tattoos" and hip electronic music by Tijuana's Nortec Collective, according to the beer's Web site.

"This is much more adventurous, more active Mexican connection," added Blaustein, comparing the Dos Equis marketing strategy to its competitor's imagery of secluded, white-sand beaches.
That may be Corona's better-known publicity, but even within its star brand, Modelo revises its message to focus on distinct buyers. So for Corona's "Linen and Lime" campaign, which is supposed to emulate the lifestyle of black sports and music stars, the turquoise ocean in the regular ads gives way to a pool around which men dressed in crisp linen suits and scantily clad women socialize.

"In an urban African-American market, the message has to be delivered in a slightly different way vs. the traditional general-market marketing," said Don Mann, marketing group general manager at Gambrinus, which will distribute Modelo's beers in the United States until the end of this year.

Analysts expect Modelo and Femsa's distribution and marketing strategies to continue fueling sales and increase profits for the two brewers. Credit Suisse's Shin expects sales to maintain their momentum and decelerate slightly by the end of the year, compared with the first quarter.
The analyst is looking for upside from both companies, although for different reasons. "Modelo is a story of profitability; Femsa is more of a growth story," he said.

Femsa's other business divisions include Coca-Cola Femsa, the biggest Coke bottler in Latin America, and Femsa Comercio, which manages a rapidly growing convenience-store chain in the region. The company is also expanding its business in Brazil through the acquisition of Cervejarias Kaiser from Molson Coors earlier this year.

With a smaller share of the Mexican and American market than Modelo, it has more space to grow, added Shin. Femsa's second-quarter profits rose 22% to 1.82 billion pesos ($167.7 million) from 1.5 billion pesos in the same period last year. The UBS target price for Femsa is $115. Femsa's shares have gained more than 20% since the beginning of the year.

Modelo may not be growing as much as Femsa, but it is more profitable. Modelo's net dividend yield in 2005 was 3.2%, vs. Femsa's 0.8%, according to UBS calculations. For 2006, the firm sees Modelo's net-interest yield at 2.8% and Femsa's at 1.3%. In the second quarter, Modelo posted net earnings of 2.60 billion pesos, up 4.8% from 2.48 billion pesos in the same period last year. Modelo's shares also have risen more than 20% since January; UBS has a target price of 52 pesos.

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