just the answer – AmBev
AmBev, InBev's Latin American operation, had a tough first quarter, hit by higher costs and poor weather in Brazil. Earlier this month, Olly Wehring met with Luiz Fernando Edmond, zone president for Latin America North at AmBev, who spoke about the challenges in the home market, the progress and potential of other Latin American countries and the opportunities both for InBev's international brands in Brazil and for AmBev's Brahma brand in the US.
just-drinks: After what AmBev has admitted was a tough start to the year, how do you see things panning out for 2008?
Edmond: I think that clearly the first quarter was bad because of the weather. In Brazil, real price and purchasing power is very important, but the weather is even bigger than these. Also, there was the issue of Carnival, which is not a fixed period of the year. This year, it was very early. The summer finishes in Brazil after Carnival.
Going forward, we had a good April and a good start to May. In Brazil, 60%-65% of consumption is on-premise. When you have rain, people don't go out. April was okay, and May is doing well.
We had food inflation from November to March. Minimum wages were increased at the end of April, beginning of May. The negative effect of the food inflation, at least part of it, will be offset. Brazil is exporting a lot, so we have the money circulating. From an economic standpoint, demand should decrease.
j-d: Cost pressures hit the region in Q1. How do you see these affecting AmBev this year?
Edmond: A lot of our costs are hedged. A long time ago, we decided that we would hedge 12 months ahead for everything that we could, especially currency, aluminium, malt and barley. I'd say that 90% of the costs are already fixed. In the first quarter, we built capacity to continue to increase volumes. You have to dilute the higher fixed costs when the volume doesn't come. In malt from third parties, we have 90% sufficiency for the year. You have to plan six to eight months in advance here. This malt is more expensive than our own malt. This also brought some negative impact, which will be diluted during the year because we used the third-party malt in the first quarter, and we don't need to use the same amount for the rest of the year.
Corn last year cost us BRL21, while this year it's BRL30. Brazil decided to sell some of its corn abroad, thinking we would have a better crop than we actually had. At the beginning of this year, we had lower inventories and we had to buy. We cannot hedge for corn. So, what happened is that we had to dilute less volume with higher capacity because we expected a better summer.
j-d: How is the rest of the Latin America North region performing?
Edmond: We have a completely different situation in Venezuela than in the other countries in the region. We've been in Venezuela for almost 13 years. The other countries are greenfield operations that we entered two or three years ago. Since July last year, Venezuela was not doing well, due to the implementation of additional taxation and inflation running at around 25%-27%. It's very difficult to do business in the country, due to taxation and inflation pushing prices up. We're not trying to gain a lot of share there, preferring to focus more aggressively on other countries, so we passed prices all the way and we've suffered a lot with volumes. From the third quarter onwards, though, we should have easier comparisons.
We're very happy with our progress in the other countries, especially in terms of beer volumes. Even in the countries where the market is growing, like Peru and Ecuador, we are gaining share. People are waiting for innovation there, however, so we have to invest in innovation trends and marketing. In the Dominican Republic, we've already achieved 13%-14% share in a young operation. We're progressing with Brahma and Brahma Light and gaining share every month.
The relevance of Peru and Ecuador to the outside world is that they are the only markets - along with China - where we're head-to-head with SABMiller.
j-d: Your prices are on average around 30% higher than your competitors' in Brazil. How do you look to compete against your rivals?
Edmond: We will not discuss that in detail, but part of that is to make them pay taxes. It's 37% of the consumer price. If you don't pay taxes, you have a big benefit.
We have to pay because of the size we are. We are a listed company, an international company, an ethical company. Until one or two years ago, 40% of working Brazilians did not have work documents. That's the reality.
We have several initiatives with the Government to guarantee that they pay. We are trying to help the Government in being more efficient in tax collection. We still have some competitors that don't pay all the taxes they should pay. We just want a fair playing-field. If we have to pay taxes, then everybody should pay taxes.
j-d: What about the InBev international brands in Brazil?
Edmond: When you compare what we've done so far in other countries like Russia, we all know we haven't done enough. On the other hand, things have progressed a lot. Stella Artois is still small, but is doing very well where it has to do well. In volume terms, it's comparatively very small but the margins for Stella are three times the mainstream margins. We will not try to grow volumes - it will be an expensive brand and we will grow as we grow distribution in the right places, but slowly.
If you look at Heineken in Brazil, they're looking to grow volume at a very low price compared to Stella. When we launched Stella their prices were much closer. Then they brought prices down. We won't play the price game in this segment. It's evolving with the right consumers.
Beck's, however, didn't test well. The Beck's name in Brazil brings an American idea. So it didn't test well as a European brand.
j-d: How is the agreement between Anheuser-Busch and InBev in the US benefiting AmBev? Would you like to further exploit your potential among the Hispanic population in the country?
Edmond: I think the Hispanic opportunity is pretty much covered today by Mexican brands. Unfortunately, they went into the US much sooner than we could. I don't see the big opportunity that they had ten years ago to enter the US today. InBev has an agreement with A-B to have the international brands there; that's a huge opportunity for both companies. A-B is under pressure in terms of international brands - this is a segment that needs to be explored; it's good for both InBev and A-B.
If we have an opportunity there, it's with Brahma, but if we want to move, we need focus. Only to be present there, we know that's not going to work. We would need the right partner, but it could not be A-B with Brahma. That's a decision that needs to be made in the future, depending on the investment we want to make and the reach and relevance we want to have in the country. Today, we need to succeed with the international agreement between InBev and A-B. The priority should be to have Stella Artois everywhere in Manhattan.
j-d: Any possible acquisitions in the current three-year plan?
Edmond: Yes. We're generating a lot of cash, so acquisitions will always be an opportunity, but with the right financial discipline. If you pay too much, you never get the benefit. If we have an acquisition opportunity that strategically and economically makes sense, then we'll pursue it. If it doesn't make sense, we prefer to pay dividends and share buybacks, to return the money to our shareholders.
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