Where Bud Isn't King Of Beers

Anheuser's Mexico pact is a financial hit but a strategic fizzle

In a corner of Valentin Diez' office stands a waist-high globe, inlaid with lapis lazuli and other semiprecious stones. It comes in handy for the chief of sales and marketing for Mexican brewer Grupo Modelo, who is pushing to open markets for the company's Corona brand as far away as Tajikistan. Jokes the widely traveled Diez of the globe he bought in Hong Kong: "We learn geography from this."

In fact, there seems to be little for Modelo to learn. The brewer boasts 54% of a growing market at home and soaring export sales, up 37.6% in the first half of 1997. And although it has U.S. giant Anheuser-Busch Cos. as its partner, the alliance has made little difference to the Mexicans, who hold their U.S. counterpart at arm's length. "Modelo continues to be Modelo with its own ideas," asserts Carlos Fernandez Gonzalez, 31, its new CEO.

That's not how Anheuser planned it. As the first equity buy in its push around the world, the U.S. brewer paid $477 million for a 17.7% share in Modelo and its operating subsidiary in 1993. It laid out an additional $605 million last May to raise its stake to 37%. As an equity investment, the deal is paying off richly. Based on share prices, the original $477 million stake is now worth around $1.7 billion. Modelo's profits rose to $159 million last year, up 17% over 1995, and to $100 million in the first half this year, 21% above the same period in 1996. By diversifying Anheuser's sources of income, the partnership fulfills one of Anheuser's major goals in taking stakes in leading breweries abroad.

As a strategic alliance, though, the partnership has fallen short. Anheuser hoped to work closely with Modelo outside Mexico and the U.S. to market a variety of brands. But there are no joint projects and no concerted attacks on export markets. Within Mexico, where Anheuser is in charge of Budweiser sales, it faces fierce allegiance to local brews. While Bud and Bud Light account for about half of all imported beer, imports still make up just 0.6% of total beer consumption.

In retrospect, it appears that Anheuser misjudged in not trying to write into the original deal U.S. distribution of Corona, the trendy Modelo brand that has carved off a sizable slice of the U.S. import market. Modelo continues to market Corona and other brands in the U.S. through independent distributors. Even so, Anheuser is so pleased with Modelo's growth and profits that it's negotiating with Modelo to boost its investment to around $1.6 billion and its ownership stake to 50.2%, though it will still have a minority of voting shares.

For Modelo, the pact with the world's biggest brewer provided support against potential invaders as Mexico lowered its import and investment barriers--as well as a windfall of dollars for shareholders. Founded in 1925 by a Spanish immigrant, Pablo Diez, Modelo remains a family affair, with four clans firmly in control. CEO Fernandez took over from his elderly uncle in May and also holds a seat on Anheuser's board. He enjoys a cordial relationship with Chairman August A. Busch III and stays at his St. Louis home when he flies up for meetings.

MORE EXPENSIVE. Fernandez wants Modelo, the world's ninth-largest brewer, to surpass its Latin American rival, Brazil's Brahma, which is No.4. In the U.S., Corona claims 17% of the import market and is gaining on top import Heineken, which had 22% in 1996. In Mexico, by contrast, consumption of Budweiser and Bud Light is limited largely to border towns and beach resorts frequented by gringos, though the beers, sold in cans, are available nationally. Noting Bud's 25% markup over domestic canned beers, Alejandro Strauch, vice-president of Anheuser's Mexico City office, says: "As incomes improve, people will be more willing to pay the higher price."

Maybe not. Surveys by market-research firm Pearson found that about 1 in 10 Mexicans consider U.S. beer among the best in the world, compared with 2 in 3 for Mexican beer. That's a high hurdle of Mexican loyalty to local brews for Anheuser to overcome.

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