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Ambev looks to take on Backus in Peru

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Brazil-based brewing combine, Ambev, is aiming to break the monopoly of the Peruvian beer market enjoyed by local rivals, Backus & Johnston, but Backus has no intention of surrendering its position easily. Owain Johnson looks at the state of play.

Any company aiming to break a local monopoly in a new market expects to have to overcome a few hurdles. But when Brazilian brewing giant, Ambev, announced its plans to extend operations into Peru, it quickly found that the hurdles could be as large as the Andean mountains that dominate the country.

Ambev's expansionist programme pits the world's fifth largest brewer, which has operations all over South America, against Peru's monopoly holder Backus & Johnston, which was recently purchased by Colombia's heavyweight Bavaria Group. Bavaria was attracted to invest in Peru for the same reason that has now attracted Ambev: Peru's low national consumption of beer and its relatively high prices.

The average Peruvian currently drinks just 22 litres of beer per annum. In comparison, Latin America's champion beer drinkers, Venezuela, drink an annual average of 82.5 litres, while Brazil, Mexico and Colombia consume 49.3, 50.7 and 29.6 litres respectively. And per capita beer consumption in Peru is at a particularly low ebb - today's 22 litres per annum contrasts poorly with an average of 42 litres in 1987 and 35 in the mid-1990s.

The Backus approach
Analysts all agree that Peruvian demand is elastic, and varies entirely according to price. When the price of beer is high, Peruvians turn instead to the giant informal sector, which is estimated to account for around 50% of all sales of alcohol. But when Backus & Johnston lowered their prices in 2003, beer consumption responded with a surge of around 10%.

Ambev executives still believe that there is room for prices to fall further still and for consumption to rise. And all the indications are that Ambev will seek, at least initially, to sharply undercut Backus' current range. Ambev is also confident that consumers will respond positively to a greater range of offerings. At the moment, Backus' Cristal range accounts for around 55% of all beer sales, and there have been very few new launches in recent years.

Ambev has a wealth of experience in breaking into South American markets and has already successfully established itself in Venezuela and Chile, despite initial fears that it would never break the quasi-monopolies enjoyed by Venezuela's Polar and Chile's CCU. Cash-rich Ambev can afford to bankroll operations in new markets, even if these take some time to establish themselves. The company's current plan for Peru is relatively modest: it is looking to attract 6% market share within the first three years.

Backus fights back
But Backus is not about to surrender even 6% of its 98% market share to its Brazilian rival without a battle. And, as the incumbent, Backus has sought to delay Ambev's entry into the market by preventing Ambev from joining Peru's exchange scheme for recyclable 620ml beer bottles on the grounds that the Brazilian company was seeking to avoid investment in bottles by making use of some of the 88m paid for by Backus.

Backus is proposing instead that the two companies should produce slightly different bottles that could still be freely exchanged. This system would allow Backus to see exactly how many bottles its rival is producing and would raise Ambev's costs. The Peruvian regulators are now set to make the final decision on the controversy, with the regulators said to be particularly anxious to avoid any scheme that could lead to accusations that one side is destroying or withholding its rival's bottles.

The construction of Ambev's new plant has also been delayed by suggestions - which cannot have displeased Backus - that the plant's operations could impact on local groundwater stocks, potentially affecting water supply to the capital Lima. Although some experts have refuted this, the controversy still rumbles on.

Backus has also defended itself vigorously against Ambev's suggestion that it has exploited its monopolistic position. Backus argues that beer prices are high solely because of the size of the government's duty on beer, and it has stepped up its well-publicised efforts to persuade the authorities to reduce the duty, which accounts for around 27.8% of the price of a 620ml bottle.

But Backus' trump card seems to be Peruvians' reluctance to move away from their familiar brands. Imports account for just 1% to 2% of all beer sales in the country, and these are limited to the very wealthiest consumers, who drink German and Dutch beers for prestige. And, despite its new Colombian owners, Backus has made great play of being a part of Peru's national heritage.

Backus would certainly prefer to rely on customer loyalty than to get involved in a price war with Ambev. A protracted battle between the two would suit the Brazilian entrant much better: the company has deep pockets and heavy discounting would give it exposure and quick market share. Whereas Backus' Colombian owners, the Bavaria Group, are still coping with the high price they paid to buy Backus and Panama's Barú brewery, and would be highly reluctant to reduce their earnings at such a time.

It seems that the initiative is with Ambev, despite the delays it is suffering in establishing itself in Peru. Whoever wins the battle, the competition is likely to stimulate the brewing industry. A recent study showed that if prices were to fall by 18%, consumption would rise by 30% which suggests there are likely to be a lot of Peruvians raising a glass to welcome Ambev to their country.

Expert Analysis

Beer - Company Profile AmBev

AmBev's Brazilian beer operations witnessed growth of just over 24% in 2001, due mainly to price increases throughout the year, designed to offset the increase in dollar-denominated costs. Prices of AmBev's three main brands, Skol, Brahma and Antarctica, rose by an average of 16.3% during fiscal 2001. A higher percentage of both direct sales and sales of products with non-returnable packaging also contributed, as did continued streamlining of the company's distribution system. Results in the International Beer division witnessed a more dramatic increase of 70% in fiscal 2001.

This report gives you an overview of Ambev's operational and distribution strategies along with the world sales performance of the company's major markets, plus new product development and core brand data.

To find out more about this report, download your sample or to order your copy, please follow this link

 

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