Mexico beer market probe could damage Heineken, Femsa Cerveza

Mexico beer market probe could damage Heineken, Femsa Cerveza

Heineken's ability to profit from FEMSA Cerveza could be weakened after SABMiller succeeded in persuading Mexico's competition authority to consider changing the rules of the game in the country's beer market.

Mexico's competition watchdog, Cofeco, has reopened its investigation of "monopolistic practices" on the country's beer market after receiving a complaint from SABMiller's local subsidiary, Miller Trading Company, and two affiliate distributors.

Cofeco has not named any defendants or suspects in the case, but SABMiller told just-drinks today (10 August) that the regulator was investigating "the exclusive trading agreements between independent retailers and the two dominant brewers in the country".

Its fresh investigation will be a concern to Heineken, which could see the market share of its recently-acquired FEMSA Cerveza unit reduced if Cofeco determines that action should be taken. Mexico is crucial to Heineken's drive to bring in a greater share of profits from emerging markets.

FEMSA Cerveza accounted for nearly 42% of Mexico's beer market in volume terms in 2009. Grupo Modelo, in which Anheuser-Busch InBev has a 50% stake, controls around 53% of the market, leaving just 5% to other players, according to recent data published by Mintel's Global Market Navigator (GMN).

SABMiller told just-drinks today that its complaint "contends that the current practice restricts its access to the market, limits consumer choice and stifles competition in contravention of Mexico’s competition laws".

Precedent and market practicalities suggest that Cofeco's inquiry, to last 120 days at the most, could easily come to nothing. Analysts at Deutsche Bank said yesterday that exclusivity contracts were “entrenched” in market culture in Mexico, adding that, without them, many small retailers would struggle to survive. Another senior analyst, who did not wish to be named, pointed out that several previous investigations "have never had much of an impact".

Still, SABMiller has several reasons to be optimistic this time around. just-drinks understands that there is private legal advice indicating clearly that the current beer market setup breaks Mexico's competition rules.

The Miller Genuine Draft brewer may, too, cite a couple of important precedents of its own. Firstly, in October 2007, Mexico's High Court upheld a ruling and fine against eight soft drinks bottlers affiliated to The Coca-Cola Co. The bottlers, one of which was Coca-Cola FEMSA, were found guilty of engaging in monopolistic practices via exclusive supply deals, which, the court said, harmed competitors such as PepsiCo.

In addition to this, Cofeco undertook a similar inquiry into the beer market in 2007 but charges were eventually dropped due to technicalities. This time around, the watchdog's investigation comes only a few months after Mexican president Felipe Calderon launched legislative proposals to tighten the country's competition laws.

Mexico is an important beer market, which, together with the US and Brazil, accounts for more than a third of the global beer sector profit pool. Mintel GMN data shows that beer volume sales slipped by 0.5% in 2009, but still rose by 6% in value. Mintel predicted that value growth will hover between 8% and 6% per year up to 2014, with market volume expanding somewhere between 5.5% and 3.5% annually over the same timeframe.

It is no surprise, therefore, that SABMiller is seeking to loosen Heineken-FEMSA and Modelo's stranglehold. The brewer was for many months the analysts' favourite to acquire FEMSA Cerveza, only, in the event, Heineken simply wanted and needed the business more.   

Any rule changes, or fines, imposed by Cofeco could eat into Heineken's return on investment for FEMSA Cerveza. The Netherlands-based brewer has a nervy few months ahead.

To see just-drinks' full coverage of the legal wrangling in Mexico, click here.