Slowdown only minor setback for Mexican beverages
Terrorist attacks and a global slowdown have not deterred major investments in Mexico's beverage industry, but soft drinks looks set to fair better than its beer and wine counterparts. Steven Lewis reports.
Recent attacks on the United States came as a blow to the Mexican economy, but the beverage sector has suffered only a minor downturn in sales. The consensus among beverage industry leaders and analysts is that the fourth quarter 2001 will bring a noticeable slowdown in beverage industry growth, but that gross sales for the year will not dip below the 2000 level.
Analysts from Standard & Poors of Mexico explain that soft drinks are a component of the basic Mexican diet and, "as a result we expect a decline in the sales volume of bottlers, but this situation will only last a few months." In addition, there is a general consensus that, rather than slipping into recession in 2002, the industry will regain the growth momentum enjoyed in 1999 and 2000.
Investing in the future
Not only are beverage industry leaders optimistic about the medium to long-term prospects for the Mexican market, but they are investing heavily to meet increased demand. A case in point is Jugos del Valle, a juice and soft drink group, which announced in October that it plans to invest US$30m over the next five years in expanding its Mexican production capacity. The investment will be used to double production of the group's Barrilitos brand soft drinks by the end of 2002.
Meanwhile, Coca-Cola Mexico plans to firm up its dominant CSD market share by expanding its product offerings and production capacity. Director of new products, Fernando Ramirez, recently stated that the company would invest US$500m per annum in launching products. Guarana-flavoured Senzao and Ciel mineral water were launched during 2001. Ramirez hinted that the company would launch four other products in 2002.
The nation's leading brewers are upping the stakes in their heated market share struggle. Femsa is aggressively going after its target of carving out a 51% share of the Mexican beer market. Management recently announced the allotment of US$530m to capital investment. Of that amount, US$350m will be dedicated to modernizing and increasing the production capacity of the Cuauhtemoc-Moctezuma brewery.
The stakes are lower for Mexico's beleaguered wine industry, which faces strong competition at home and abroad. A report recently released by the National Association of Wine Producers revealed that its members would invest US$3m dollars in production plant upgrades in order to capitalise on growing demand for table wine. That will position Mexican wineries to achieve their sales growth target of 3% this year, while competing more effectively against foreign products that now supply 60% of the wine consumed in Mexico.
A mixed 4th quarter panorama
Industry leaders generally agree that the most difficult period in terms of sales will be the fourth quarter of 2001. I
".... the hostilities in Afghanistan will not harm the industry"
Laura Ramos, industry analyst at the Mexican office of the analysis firm ABN-AMRO, explains that a number of market forces including Mexico's economic slowdown, unusually rainy weather, and a minor devaluation of the peso, led to a minor setback in beverage industry sales starting in the third quarter, However, Ramos believes that the hostilities in Afghanistan will not harm the industry. She explains that, "rather than negatively impacting beverage companies, the war could benefit them, because it has been proven in the past that wartime economies stimulate consumption (in Mexico)."
The US border region, battered by a sharp reduction in maquiladora activity, is the only one likely to experience a sharp decline in beverage sales during the 4th quarter.
The US economic situation has had little impact on Central Mexico, where the great majority of the populace is located. Coca-Cola Femsa is a case in point. Deutsche Bank analysts in Mexico were quoted as saying "Sales volume should grow in Central Mexico from our point of view. Even though prices have suffered, they have not eroded sales."
Jugos del Valle experienced strong sales gains in 2001 thanks to expansion in Central Mexico. Roberto Albarran, president of Jugos del Valle, was quoted by El Norte newspaper as saying "Barrilitos has been an extraordinary investment for us. This year soft drink sales grew 40%."
Pepsi-Gemex has suffered a market share loss in the Mexico City area, but this was balanced out by gains in other areas. To a degree, gains are attributed to Pepsi's decision not to raise prices as abruptly as Coca-Cola during 2002. Deutsche Bank analysts say, "We don't expect negative surprises in profitability. The company is launching new products and price increases have been lower than those of Coca-Cola bottlers."
Stress in the beer sector
The beer industry was buffeted more severely than other beverage sectors by the economic slowdown. Analysts described Mexican beer sales as "stressed" even before September 11th. Mexico is a mature beer market dominated by Grupo Modelo and Femsa Cerveza. Per capita beer consumption is not likely to increase, so growth prospects for both companies mainly hinges on sales in the US, which is also a slow-growth market at the moment.
Salomon Barney analysts recently revised their 2001 growth projection for Grupo Modelo downward from 3.4 to 3.1%. At the same time, they dropped the 2002 growth projection from 3.4 to 2.5%.
Slow expansion of the beer market in both Mexico and the United States will make it difficult for Mexican brewers to achieve a broad based recovery during 2002. It looks now as though other sectors of the beverage industry will regain momentum by mid-year, but beer and wine will be locked into a slow growth pattern until 2003.
The chart below shows targets of the roughly US$232m capital investment announced by Grupo Modelo in September of 2001. The amount destined for each company is shown as a percentage.
COMPANY % OF TOTAL
Cervecera del Tropico .......... 29
Cervecera de Zacatecas ......... 27
Brewers and service companies .. 26
Sales .......................... 18
Grupo Modelo, 3rd quarter report
The chart below shows the main components of income for Grupo Modelo during the third quarter of 2001 as percentages of total income. It also shows the variation from the third quarter of 2000.
COMPONENT % OF TOTAL % VARIATION
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