just On Call - Grupo Modelo warns on beer discounting
Crown Imports looks to cut back on promotions in the US
Grupo Modelo has warned that the current levels of discounting in the sluggish US beer market are unhealthy for the industry.
Modelo is confident that volume sales for its beer joint venture in the US, Crown Imports, will rise in mid-single digits in 2011. If correct, Crown can expect to outperform Anheuser-Busch InBev and MillerCoors in a national beer market that is struggling just to remain flat.
Modelo's chief sales and marketing officer, Jose Pares, said that Crown Imports is planning to cut the number of promotions running on its beers. "If the volume continues moving in the way we've been seeing, the first thing we'll be doing is removing the frequency of price promotions," Pares told analysts on a conference call for Modelo's first quarter results, late last week.
He warned that discounting in the US beer sector, as brewers fight to retain cash-strapped consumers, could create problems over the longer term. "We're seeing a lot of aggressive pricing initiatives from most of our competitors," said Pares. "I don't think that this is healthy for the industry."
Without naming specific brands, he said that 12-packs of some imported beers are available for as little as US$8.99 or $9.99.
Crown, which is owned jointly by Modelo and Constellation Brands and sells Corona Extra in the US, has had a strong start to the year. In Constellation's fiscal fourth quarter, to the end of February, Crown reported net sales up by 15% to $480m and operating profits up by 18% to $97m.
Modelo's export volumes rose by 15% in the first quarter of calendar 2011, driven by the US. "In the US," the MExico-based brewer said, "we outperformed the import segment due to the good performance of all our brands at the consumer level and because our distributors are taking measures in anticipation of the start of our highest selling season."
Despite Modelo's concerns around discounting, Pares said that Crown does not feel able to increase its prices in the US this year. However, cutting back on promotions will "allow us to reallocate some of our resources to marketing", he said.
Input costs are expected to weigh more heavily on Modelo's business as 2011 progresses. The brewer said that it does not have any hedging in place and is reliant solely on market prices for raw materials, such as grain and aluminium. However, group CFO Emilio Fullaondo said: "We feel confident that we'll be able to manage, more or less, our cost of goods per hectolitre."
For the three months to the end of March, Modelo saw net profits come in 6.7% up on a year earlier, at MXN3.36bn (US$285.2m). Net sales totalled MXN19.25bn, a 9.6% improvement on Q1 2010, while operating profits jumped by 14.2% to MXN4.90bn.
To download Modelo's Q1 conference call, click here.
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