Latin American Beer Market Holds Tremendous Appeal
The Latin American beer sector is generally characterised by high consumption and high growth making it one of the most attractive regional markets for multinational beer producers. The economic slowdown has curtailed demand to some extent, but given the high rate of growth between 2002 and 2007, we expect this to only be a short-term phenomenon, with consumption once again advancing at a rapid pace once the economic outlook improves. In most countries the sector is highly competitive, although this is often due to the dominance of a single leading player, rather than the existence of a truly competitive market. This makes market entry difficult, but, given the potential rewards on offer, multinational brewers continue to invest to expand their reach and forge partnerships with local operators to get their brands into the hands of consumers that are increasingly keen to experiment with premium and foreign beer varieties.
Brazil is the region's largest beer market and is dominated by Anheuser-Busch InBev, which controls around 69% of the market through its AmBev subsidiary. This dominance is achieved through extensive tie-ups with bars, restaurants and retailers, allowing AmBev to sell its products, most notably Brahma and Skol, at a price significantly above those of its rivals. In the first half of 2009, AmBev's Brazilian unit posted mixed results, with a weak Q1 but a much stronger Q2. This makes it hard to determine where the market will be going in the rest of the year, although there are signs that AmBev is expecting a tough 12 months.
In March AmBev announced it is to close a factory in the state of São Paulo and shift production to its other plants in the state. Although AmBev insists that the decision has been taken on cost grounds and its volumes will not be impacted, BMI believes the move is partly a response to a reduced rate of growth being recorded in the beer sector and industry developments that have had a disproportionately adverse effect on the brewer. AmBev's decision to close the plant may not have an impact on the firm's current production volumes, but will surely make a dent on its total production capacity and implies that AmBev does not believe it will be in need of this extra capacity in the near future.
In addition to the impact from the downturn in the economy, AmBev has been shaken by a tough new law against drinking and driving, which disproportionately affects the firm as it derives a higher percentage of its sales from the on-trade market than its competitors and by a new tax regime that will see alcohol taxed on the basis of a beverage's retail price. As AmBev's products sell at prices that are around 30% higher than the country's other brewers, it will feel a greater impact from the new tax regime than its competitors. AmBev may choose to respond by increasing prices which will put further downward pressure on volumes.
Despite these negative developments, in the first quarter of 2009 Brazil was a strong performer for AmBev with sales rising by 7.6% to reach 17.8mn hectolitres, offsetting weaker performance in other parts of Latin America. This strength was attributed to two sustainable factors: an increase in the minimum wage and a reduction in food price inflation. However, it was also attributable to favourable weather and a late carnival which limits the extent to which this result can be extrapolated over the rest of the year. Nevertheless, the fact that volumes did not decline, despite Brazil facing its first recession for years, is an indicator of the resilience of the sector. BMI expects beer sales to stagnate in 2009, but expects growth to quickly return in 2010 (see chart one) and this pattern is expected to be replicated across most markets in the Latin American region.
The country's second largest brewer is privately-owned Schincariol, while FEMSA Cervejas Brazil takes the number three position (see chart two). FEMSA Cervejas Brazil is controlled by Mexico-based FEMSA, although Heineken has a small stake in the business which could signify as yet unfulfilled ambitions in the Brazilian market. The dominance of AmBev has made other multinational brewers reluctant to attempt a full-scale launch in the country. However, given the market's size and growth prospects Schincariol is often talked about as being an attractive target, either for FEMSA or a multinational brewer with the size and courage to take on AmBev in its own back yard. Given its existing interest in the market, and its limited exposure to emerging markets (when compared to other multinational brewers), Heineken could be considered the ideal suitor. The firm has previously said that it is reluctant to overpay for emerging market assets, but the downwards pressure on asset prices since the onset of the economic downturn would make now a good time to strike. Certainly the Brazilian beer sector does not look fully consolidated and we expect further merger and acquisition activity over the next few years.
Many other Latin American markets are even more highly concentrated than Brazil. SABMiller is a leading player in several countries through its purchase of Colombia-based Bavaria in 2005. This acquisition gave SABMiller a virtual monopoly in four Latin American markets - Colombia, Peru, Ecuador and Panama. This market dominance made Latin America one of the firm's most profitable locations, with profit margins up to 50% higher than in other regions because of its ability to influence retail prices.
SABMiller's progress in Colombia provides a good example of the power of a multinational brewer to build upon what, at first glance, looks like a relatively unattractive market. When it entered Colombia per capita consumption of beer was low and stagnant; beer drinking was frowned upon by wealthier consumers and many of Bavaria's brands were often regarded as the same product packaged differently. It launched a successful marketing blitz which included differentiating Bavaria's portfolio of brands and launching the premium Italian brand Peroni to encourage beer to be seen as an aspirational product.
This strategy has been roughly replicated in the firm's other Latin American markets. However, although these moves have successfully boosted consumption, they have also made the market more sophisticated and opened consumers' eyes to the wide range of beers available from around the world. Since 2005 the level of competition has gradually been increasing in all of these markets. For example in Colombia the firm is under pressure from the growing popularity of imported beers and in particular from US brewing giant A-B InBev's Budweiser brand. Anheuser-Busch launched Budweiser in Colombia in 2006 through an arrangement with the country's largest retailer Exito. Budweiser quickly became one of the most popular beers in Colombian supermarkets and the success of this venture encouraged A-B to broaden its distribution channels. In February 2007 the firm entered into a distribution agreement with Heineken which saw Budweiser become available in bars, restaurants and family-owned retail outlets.
These developments demonstrate that the relative immaturity of many markets mean that opportunities exist for multinational brewers with strong brands, even if the market is dominated by a single firm which looks to have established an unassailable leading position. The progress of Chile-based Compañía Cervecerías Unidas (CCU) in Argentina is another example of this pattern. The firm is jointly owned by Dutch brewing giant Heineken and Quiñenco - a Chilean business consortium - and in both Chile and Argentina it is particularly strong at the premium end of the market. In Chile CCU leads the beer market with a 33% share, but in Argentina the company is up against tough opposition in the shape of Quilmes, owned by A-B InBev, which controls around 75%. However, CCU has carved itself a niche and has successfully grown to become the country's second largest brewer with around 18% of the market. This has been achieved by offering a number of the world's most desirable premium beer brands, including those owned by joint parent Heineken and others, such as Guinness, sold under license. In Latin America economy and mass-market brands from international brewers usually have to compete against better known local brands that are often cheaper. This drives down margins and means that many brewers started to recognise that the premium end of the market is often the most attractive emerging market segment. While this trend may be temporarily put on hold in light of the economic downturn, it is still expected to be one of the most important forces driving sales growth in 2010 and beyond.
CCU's performance in the first half of 2009 gives an interesting insight into the state of the Argentine and Chilean markets. Overall the firm reported a 4% rise in volume sales for the first half of 2009, following an upturn in the Chilean beer market in the second quarter. However, progress in the Argentine market appears to have stalled with volume sales down by 1% compared to growth of 31.5% in the first quarter (see chart three). The resilient performance in Chile in the second quarter of 2009 is in line with our forecasts for the country's beer sector. Large fiscal reserves make the country relatively well-placed to cope with the global economic downturn and it is among a handful of Latin American countries not expected to slip into recession in 2009. Although consumer spending has retracted in line with a drop in confidence, spending on alcohol is not expected to drop significantly over the year.
In contrast we have long predicted that Argentina's economy is unstable and believe the expansionary policies of the last five years have left the economy poised for a harsh and prolonged recession, and CCU's results could indicate a tipping point somewhere between the first and second quarters of 2009. Although Argentina's economic activity index continues to show expansion, data on industrial production, retail sales, construction output and imports suggest that the economy is slipping into recession. Although we will have to wait for CCU to publish its full first half results (due in the first week of August) to ascertain exactly why the firm's Argentine beer sales have fallen so far so quickly, this result could certainly be an ominous sign for what was always an inherently risky market.
In conclusion, the dynamic growth in consumption across the region between 2002 and 2007 indicates that Latin America continues to offer some of the best opportunities anywhere in the world. We see the current stagnation in beer consumption to be a short-term phenomenon for the majority of Latin American markets, although some, including Argentina and Mexico, may take longer to return to growth. Although many markets are characterised by the existence of a single dominant player, the success of CCU in Argentina and A-B InBev's Budweiser in Colombia indicates that this need not be a complete barrier to growth for other producers. As the region's largest market, and also one of the most dynamic, Brazil will continue to attract the interest of the world's major brewers. However, whether 2010 will be the year when one of them chooses to take on the might of the world's largest beer company and launch a bid for privately owned Schincariol remains to be seen. Outside of Brazil the opportunities for expansion through acquisitions look less intriguing. The leading players in each market are likely to continue to mop up small, independent producers. However, for most producers expansion is likely to be driven by distribution and licensing deals with current operators, with both Latin American and multinational firm's keen to extend the reach of their most high profile brands.