Analysis: Schincariol back on track and attracting attention
Having recovered from a tax scandal in 2005 and now back in growth, the privately owned Brazilian brewer Primo Schincariol has become a takeover target for international players keen to expand their presence in the growing Brazilian beer market. Nuria Sadurni of Euromonitor International assesses the Schincariol recovery and identifies possible bidders for Brazil's second largest brewer.
With a volume share of 11.4% in 2005, and a platform set for further growth, second-ranked and privately-owned local brewer Primo Schincariol represents a tempting acquisition opportunity for major brewers looking to expand in Brazil, the third largest beer market in the world.
The opportunity offered by Schincariol is certainly significant. Not only is Brazil already a massive market, but it is showing robust growth, on the back of rising disposable incomes, relatively low per capita consumption and a high proportion of young consumers. Euromonitor forecasts the Brazilian beer market will grow by 23% in volume terms between 2006 and 2011, while the premium segment has grown by 132% in the last three years.
The first major shake-up of the Brazilian market came about through the formation of the world's largest brewer via the merger of local brewer AmBev with Belgian brewer Interbrew in 2004. InBev is by far the largest player in Brazil, holding 67% of total volume sales in 2005. This was followed in 2006 when Mexico-based Femsa acquired a 68% stake in Brazil's third-placed brewer Kaiser from Molson Coors.
Of the remaining companies within the top five - Primo Schincariol, Cervejaria Petropolis and Cervejarias Cintra Indústria e Comércio - Schincariol is the prime target for international brewing groups due to its higher share and its presence in the premium end of the market.
Following a brush with Brazilian authorities over charges of tax evasion by senior executives, including controlling family members, Schincariol has made considerable efforts to distance itself from its troubles in 2005. A two-year old restructuring programme, outlined by management consultants McKinsey, is reported to have borne fruit in early-2007, with share decline stemmed and combined sales of beer and soft drinks for 2006 rising by 18% to R$3.7bn.
At the beginning of 2006 a new ad agency was chosen for flagship brand Nova Schin and the company's advertising and marketing budget for the year was increased by 10% to 15% from 2005. Later in 2006, the development bank BNDES relaxed borrowing constraints on Schincariol imposed after the allegations of tax fraud in 2005, and in early-2007 the company announced the creation of the position of CEO with a non-Schincariol family member taking control of day-to-day operations.
The company has also actively expanded. Although beer represents 71% of its total volume sales, Schincariol also looked to expand in its key stronghold in the northeast of Brazil, with the purchase of soft drinks producer Conny Industria e Comercio de Sucos e Refrigerantes offering valuable production capacity in Alagoas state. Meanwhile, its acquisition of Sao Paolo-based artisanal brewer Baden Baden marked Schincariol's intention to expand its presence in the dynamic premium beer sector.
So with Schincariol back on track, Euromonitor International expects to see strong interest from a number of brewers. Chief among them is SABMiller which had expressed an interest in acquiring the company previously but backed away amid the tax scandal. SABMiller typically operates a strategy of acquiring and then promoting local brands rather than imposing an unknown foreign brand on a new territory.
Having acquired Bavaria in Colombia in 2005, Schincariol would represent an opportunity for SABMiller to improve market share in the Latin America region. Few problems would exist for SABMiller as its current production and distribution agreement with Ambev for Miller Genuine Draft in Brazil can be terminated at any time. In Nova Schin, SABMiller would gain Brazil's third-ranked standard lager with a particularly strong presence in the country's fast-growing northeast region.
Schincariol's recently-acquired Baden Baden brand would also boost SABMiller's presence in premium lager, where its Miller brand has suffered a steady loss of share in Brazil in recent years. SABMiller also has the necessary financial muscle to invest heavily in firmly establishing a brand in Brazil's premium beer segment. In addition, SABMiller could possibly take one of Schincariol's brands into the international arena, just as InBev has done with the Brahma brand. Further synergies are to be found in soft drinks, as both Schincariol and SABMiller have significant soft drinks operations and Brazil is the world's third-largest market for soft drinks after the US and Mexico. SABMiller however would have to persuade some of its nervous shareholders of the merits of further acquisition, given that some have expressed concern over SABMiller spreading itself too thinly.
Heineken may also be interested in acquiring its own operation in Brazil, having seen its distributor Kaiser taken over by Femsa. Schincariol would provide a platform for the Dutch giant to exploit the global brand equity of its premium Heineken lager in one of the most important beer markets.
Heineken has considerable interests in the wider region through distribution agreements with CCU in Argentina and Chile, while retaining a minority share in Kaiser, but the Heineken brand has been notable for its weakness in Brazil's growing premium lager segment in recent years and for its poor distribution. An acquisition of Schincariol would also fulfil Heineken's strategy of attacking markets with a combination of established local brands and its strong multinational brands.
With profitability the current watchword across the beer industry, some experts maintain it is necessary to have 20% volume share of a market to achieve critical mass. It is likely that Schincariol would also be of interest to smaller rival Femsa to build on its presence, having made its first move into the Brazilian market with the purchase of Kaiser in 2006. Further expansion into Brazil would also bolster its attempt to offset likely competition in its Mexican home market.
Outside bets include North American brewers Anheuser-Busch and Molson Coors. With the former's focus firmly on the profitable US market, emerging China and India, and a strategy geared more towards licensing agreements, an acquisition in Brazil is less likely.
Any interest from Molson Coors would represent a prompt return to Brazil for the US/Canadian company, which only sold the loss-making Cervejarias Kaiser to Femsa just over a year ago. Molson Coors has already been stung with heavy losses and with the price tag on Schincariol expected to be high after its recent good results, Euromonitor International believes a move by Molson Coors would be unlikely.
Sectors: Beer & cider
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