The arrival of the giant Ambev on the Brazilian beer market was meant to see the end to all competition in the Latin American market. But as Steven Anderson reports, despite growing economic difficulties Ambev's competitors are far from buried.

Although just one company controls nearly 70% of the world's 4th largest beer market, industry leaders and market analysts in Brazil insist the country's beer market is still highly competitive.


Brazil's Brahma, Skol and Antarctica brewing companies merged to form AmBev to compete against larger international companies
AmBev, which accounts for 69.5% of Brazil's beer sales is a result of Brahma, Skol and Antarctica, three of the country's brewers merging as one, in a bid to compete against larger international companies.

Similar mergers in Brazil's largest industries have become the trend since the government loosened anti-monopoly and trade restrictions during the 1990s. In many cases just one company controls more than two thirds of a single industry, making Brazil one of the world's most concentrated markets.

Paulo Correa, Economy Undersecretary says the need to compete in both domestic and international markets forces companies to merge. Globalisation, he says, pressures Brazilian industries to search out associations to operate in new markets with higher costs.

"When the economy was opened to more international competition, the shock of this led companies to join together. This helps support the robustness of Brazil's economy," he says. "And does not interfere with the nation's competitive environment."

Marcos Mesquita, president of the Beer Industry Association says competition has actually improved since the creation of AmBev last year. Beer companies, he says, have sought to make their products stand out leading to greater product differentiation.

For Mesquita, the greatest example of market competitiveness is the success of Cervejaria Kaiser, the country's second largest beer producer. Kaiser, he notes, has grown more than its larger competitor. AmBev's market participation fell nearly 2% during the same period that Kaiser's share rose from 12.9% to 15.1%.

Kaiser's success has prompted international companies to make bids for Kaiser's ownership in an attempt to enter Brazil's beer market. The first offer came from Netherlands-based Heineken, the world's second largest brewing company, which already owns a 15% stake in Kaiser. Although speculation abounded for months about a possible buyout, the deal eventually fell through because Heineken was unwilling to pay more than US$600m for the company.

The UK-based South African Breweries (SAB), the world's fifth largest beer producer, then made an offer of US$500m. This was also rejected because the price was again too low.

Bavaria's market share also grew after AmBev sold the division to Canada's Molson at the beginning of this year. At the time of the deal the company had a 3.3% market share. After Molsen invested in a restructuring program it had captured another 0.9% of the market.

Furthermore, industry figures released recently show that Brazil's micro-brew industry is also providing healthy competition for larger firms. The figures claim that small, regional beer producers account for just 4% of the market, but still earn some US$173.9m per year in sales.

Although this figure seems small in a US$4.3bn beer market, Mesquita says that as long as the larger companies fight among themselves, there is always room for smaller breweries.

"Many consumers like regional beers. They prefer to drink a beer made close to home," he says.

Since smaller beer producers target regional consumers, these companies are supported by low distribution costs and sometimes offer lower prices. In addition, the bigger companies do not send their products to certain remote areas of the country.

But even in larger cities, consumers are drawn to micro brews like Guitt Bier, introduced in May by the Convencao group. Geraldo Guitt Convencao, trade director, says the beer sells because of the quality guaranteed by small-scale production.

The company, which distributes primarily to restaurants and bars in Sao Paulo and nearby Itu is hoping to sell 500,000 bottles of Guitt Bier by the year end.

Small producers, however, may be the most affected by the recent economic instability in Brazil. Brazil's economy has been affected by an economic crisis in neighbouring Argentina, as well as an electricity shortage and energy rationing.

In January, industry leaders projected the beer industry would grow 6% during the year. Mesquita said in August that the rise in the price of the dollar could cut these expectations in half. While it is an industry with high growth potential, Mesquito claims Brazil's beer industry is highly sensitive to economic change.


"While it is an industry with high growth potential, Brazil's beer industry is highly sensitive to economic change"
Mesquito

"If we grow 4% it will be a lot," Mesquito said. Analysts and investors, however, have a positive outlook for AmBev.

The company announced in August a 22.5% increase in net income during the first half of this year, totalling some US$1.1bn.

In June a ranking of 153 Bovespa stocks, by Brazil's Estado News Agency (AE) and the Economatica economic analysis firm, listed AmBev stock as the overall best buy for investors.

Economatica analysts say AmBev inspires high investor confidence because the merger resulted in higher profit margins.

Another factor in investor confidence is AmBev's growth potential due to its greater resources. This fuelled AmBev's 7.5% stock growth during the first quarter of this year, while the Bovespa shrank 5.4% during the same period.

One of AmBev's primary growth plans is to reach out into the international markets. The company already makes 50% of beer sales in Uruguay, 16.7% in Argentina and 7% in Paraguay. It purchased Paraguay's Cervecerias Internacional in August as part of a plan to double its production and eventually attain a 30% share of Paraguay's market. It has also introduced Antarctica beers in Portugal.

AmBev sales are expected to increase in Brazil due to higher than normal temperatures, which have been projected for the coming summer, which generally means an increase in consumption.