Life's A Beach For Corona -- Or Is It?

Sales growth is slowing in the U.S., so Grupo Modelo is searching for better margins and new customers

It's a chilly night in Brooklyn, but Mike McGraw, sitting at a sports bar and clutching a frosty bottle of Corona Extra, is basking in a warm, sunny glow. "It takes me back to being on the beach, and I feel relaxed and mellow just thinking about that," says the 29-year-old Bloomberg news salesman of his favorite brew. "It's the only beer I'll drink."

That's the sort of brand loyalty that has made the Mexican lager the No. 1 imported beer in the U.S. for eight years running. Lore has it that California surfers discovered Corona while hanging ten on Mexico's Pacific Coast in the 1970s. Today the golden beer in the clear bottle -- more often than not topped off with a wedge of lime -- is Mexico's best-known export, with an estimated 97 million cases sold in the U.S. last year -- about 50% more than Heineken, which ceded the numero uno spot to Corona in 1997. Corona's parent, Mexico City brewer Grupo Modelo, has steered clear of the testosterone-soaked territory that is the domain of leading American brands like Budweiser and Coors. Corona's quiet, understated ads sell escape -- a beach in a bottle. "When a consumer brand does a really good job, it becomes a cultural icon, and that's what Corona has done," says Harvard Business School professor Rohit Deshpandé, who authored a case study on the Corona marketing phenomenon.

But can Modelo keep sales of Corona from going flat? At first glance, you would hardly think this was an issue for 38-year-old CEO Carlos Fernández. The family-run brewer, in which Anheuser-Busch Cos. (BUD ) holds a 50.2% stake, commands a leading 56% share of the Mexican beer market through a portfolio of brands that also includes Modelo Especial, Negra Modelo, Victoria, and Pacífico. And while others in the industry, such as South African Breweries and InterBrew, have expanded internationally through acquisitions, Modelo has instead relied on exports to conquer new markets. Shipments from its seven Mexican breweries to more than 150 countries climbed more than 7% in 2004, and now account for about one-third of overall sales. Analysts expect Modelo to report 2004 sales of around $3.9 billion and net profits of about $500 million -- a 9% increase on the previous year's figure. "We may not be making headlines in the world's papers with news of big transactions, but we just keep on growing," says Fernández.

Yet after years of heady growth, Modelo's boss faces a changing marketplace and growing competition. U.S.-bound shipments of Corona, which grew in the double digits through the 1990s, rose by less than 2% last year, a sign that U.S. thirst for premium imports may be becoming sated. Meanwhile, competition is heating up stateside. Mexico's No. 2 beermaker, Fomento Económico Mexicano (FEMSA), has inked an agreement with Heineken to distribute its Dos Equis, Sol, and Tecate brews in the U.S. These factors may be weighing on Modelo's shares: They climbed 17% in 2004, yet way underperformed the Mexican bolsa, which posted a spectacular 49% increase.

Fernández, who hails from one of the brewery's three founding Spanish families, is working to bring more focus to the 80-year-old company. Last year he sold off the company's three soccer teams -- although that still leaves five baseball teams and nine sports stadiums. Also in 2004, Fernández bought out more than half of his 80-odd distributors throughout Mexico. With 80% of domestic distribution now under its control, Modelo should be able to wring a bigger profit out of every case of beer it sells. "They've identified a number of sources of inefficiency and waste, and they're working on them so they can focus just on brewing," says Merrill Lynch & Co. (MER ) analyst Robert Ford.

Now, Fernández is moving to exercise more control over operations in his most important overseas market. BusinessWeek has learned that Modelo wants to buy out the import contract from one of its two U.S. importers, San Antonio-based Gambrinus Co. Although Modelo would not provide details, sources close to the company say Modelo and Gambrinus are engaged in arbitration talks. Run by a former Modelo export manager, Gambrinus coordinates distribution of Modelo's brands in the eastern U.S., handling around 64 million cases last year. Says account executive Don Mann: "You can make a pretty strong case that we know what we're doing in driving the brand."


The maneuver could backfire, though. Merrill's Ford figures that by cutting out Gambrinus, Modelo could add about 5.6% to overall operating income, or about $64 million annually. But he cautions that "U.S. distributors and wholesalers have played a very valuable role in their success in the U.S. The last thing they want is to undermine that relationship and that trust."

Company insiders say Anheuser Chairman August A. Busch III has long urged Fernández to take over U.S. imports to cut out middleman fees. Modelo's boss has worked to smooth relations with his American partners after the two companies had a falling out in the mid-'90s over Anheuser's attempt to exercise an option to increase its initial 17.7% stake in the Mexican brewer. An arbitration panel ruled in Anheuser's favor. Nowadays, Fernández joins the 67-year-old Busch III on duck and quail hunting expeditions when he's attending board meetings in Missouri. "We couldn't be happier," says Busch III, with the "hard-charging company." Indeed, Modelo contributed 11% of Anheuser's total net income in 2004, estimates Merrill's Ford.

If Fernández manages to pocket more of the margins from distribution in the U.S., the next big challenge is to replicate Corona's success with some of his other brands. With its low-key sand-and-surf ads -- a recent TV spot shows a sunbather skipping his annoying pager across turquoise waves -- premium-priced Corona has found a loyal following among American baby boomers and younger yuppies. "We have to keep up the image of the good life that other brands have tried to get into," says Fernández.

But if growth in sales of Corona Extra is starting to fizz out in the U.S. white-collar market, Modelo has to look elsewhere for growth. That's why Fernández wants to stake a claim on the 40-million strong Hispanic market with Modelo Especial: Sales of the brew rose an estimated 35% in the third quarter of 2004. The beer, which is priced on par with U.S. domestic labels, is especially popular among Mexican immigrants. But Modelo is not the only brewer angling for this segment of customers. By piggybacking on Heineken's distribution network, FEMSA is hoping to get its chelas (Mexican slang for beer) in the hands of more beer-loving Latinos. Miller, meanwhile, recently inked a $100 million, three-year deal with Spanish-language broadcaster Univisión Communications Inc. (UVN ) that will see its ads air in coveted slots such as broadcasts of the 2006 World Cup. Looks like Fernández will be too busy defending his turf to lounge around on a beach.

By Geri Smith in Mexico City, with Lauren Gard in New York and Joseph Weber in Chicago

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