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Big Mexican brewers forced to open local beer market

Bottles of Corona beer sit in a fridge at a bar in Cancun June 29, 2012. REUTERS/Victor Ruiz Garcia
Bottles of Corona beer sit in a fridge at a bar in Cancun June 29, 2012. REUTERS/Victor Ruiz Garcia

By Elinor Comlay and Luc Cohen

MEXICO CITY (Reuters) - Mexico's biggest brewers, Corona maker Grupo Modelo and Sol producer Cuauhtemoc Moctezuma, have agreed to face more competition to end a dispute over their long domination of the domestic beer market, the world's sixth-biggest.

Mexico's Federal Competition Commission (Cofeco) said on Thursday that Modelo, a unit of Anheuser-Busch InBev SA , and Cuauhtemoc, which belongs to Heineken NV , would in the next five years have to reduce exclusivity deals they have with clients in Mexico or face heavy fines.

The directive follows a longstanding complaint from rival SABMiller , whose brands include Miller, Grolsch and Peroni, and which has struggled to make headway in Mexico.

In terms of the amount of beer consumed, Modelo accounted for some 56 percent of the Mexican market in 2012, with Heineken Mexico at 43 percent, data from market research firm Euromonitor shows. SABMiller was a distant third with 0.3 percent.

The two brewing giants agreed to conditions that include limiting exclusivity deals in convenience stores and restaurants to a maximum of 25 percent of points of sale, reducing this to 20 percent over the next five years.

In addition, no such agreements may exclude sales of artisanal beer brewed by small-scale beer makers, Cofeco said.

The watchdog also set a penalty for breaking the terms of the agreement at up to 8 percent of Cuauhtemoc's or Modelo's annual Mexican revenue.

Modelo had domestic sales of 51.6 billion pesos ($4.01 billion) last year, implying a penalty of up to $321 million - or about a third of the company's net profit in 2012.

The settlement gives microbrewers, as well as SABMiller, a better chance to compete, but not everyone was persuaded.

SAB Miller's Mexico unit said a complete opening of the market would have been better for all involved. "Miller is analyzing the settlement to determine its response in due course," Armando Valenzuela, chief executive of Miller Trading Company in Mexico, said in a statement.

One of Cofeco's five commissioners voted against the settlement because he wanted a stronger ruling. "In principle, I think these exclusive agreements are wrong, because they reduce choice for consumers," said Miguel Flores.

Exclusive agreements between restaurants and bars and the dominant pair of brewers already account for 25 percent to 30 percent of the market, the commissioner said. "This is just formalizing the status quo. There is no change in the market," said Flores.

The ruling, which allows existing agreements to expire, was "not that harsh" Credit Suisse said in a research note.

SABMiller would have improved access to the market, but it still faces some barriers to Mexico, including its brand portfolio, Credit Suisse analyst Antonio Gonzalez wrote.

Shares of Heineken and AB InBev, the world's biggest brewer, closed up nearly 1 percent after the decision. Shares of SABMiller, the second-largest brewer worldwide, were up nearly 2 percent on the London Stock Exchange.

DOMINATION

Restaurants and bars in Mexico have received a range of incentives for entering into exclusivity deals with the brewers, including awnings, games, refrigerators and discounts on inventory purchases, if sales are high enough.

Many Mexicans have looked forward to change in the market, which is a duopoly for the two big brewers.

"The monopoly that Grupo Modelo and Cuauhtemoc have is really screwed up," said Paco Bernal, the dreadlocked manager at El Palenguito, a small, dimly lit mezcal bar in Mexico City's Roma Norte neighborhood, earlier this week.

AB InBev and Heineken have carved up much of Brazil's market in addition to that of Mexico, while SABMiller has leading positions in smaller Latin American nations such as Colombia and Peru.

Following the Cofeco settlement, SABMiller will probably start offering big discounts and lots of incentives to Mexican retailers, said James Mosher, an expert on the brewing industry at the CDM Group consultancy.

"I would expect, depending on how effective the agreement is ... in 10 years they'd be able to grab 10 percent of the market," Mosher said.

AB InBev this year completed the purchase of the half of Modelo it did not already own, after settling a dispute with the U.S. Justice Department.

Dutch brewer Heineken acquired Cerveceria Cuauhtemoc Moctezuma, whose other brands include Dos Equis and Indio, from Coca-Cola bottler Femsa in 2010.

Femsa, which has a 20 percent stake in Heineken, operates convenience store chain Oxxo and has exclusivity deals to sell the Dutch company's beers. Modelo has similar agreements with bars and restaurants. ($1 = 12.8570 Mexican pesos)

(Additional reporting by Tomas Sarmiento, Gabriel Stargardter and Alexandra Alper; Writing by Dave Graham; Editing by Gerald E. McCormick, Dan Grebler, Bernard Orr, Gary Hill, Steve Orlofsky and Miral Fahmy)

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