Heineken Weighs New Brewery for Mexico Comeback in AB InBev Duel

Heineken NV may build a new brewery in Mexico as it wins back market share lost after its 2010 purchase of the nation’s second-largest brewer, said Marc Busain, the company’s top executive in the country.

The Amsterdam-based brewer, the world’s third-largest, boosted its Mexican market share last year to about 42 percent after a decline in 2011, Busain said last week in an interview in Mexico City.

The gain is bolstering Heineken as Anheuser-Busch InBev NV, the world’s largest brewer, completes a $20.1 billion purchase of Corona maker Grupo Modelo SAB and Mexico’s antitrust regulator decides whether to allow more competition in beer. Heineken, with brands including Tecate and Sol, is studying plans to build its seventh brewery in Mexico by 2016, assuming growth continues and the government doesn’t raise beer taxes.

“We want to gain a lot of market share here in Mexico,” said Busain, president and chief executive officer of Heineken’s Cuauhtemoc Moctezuma unit. “When you have a combination of the positive demographics and the economic growth and you have every year about 1 million people reaching the drinking age, that’s where you need to be.”

While Busain declined to say how much Heineken might spend on a new plant, a brewery of the size being considered typically would cost as much as 400 million euros ($534 million), he said. The company is studying possible locations.

Key Market

“Given the importance of the country, given the fact that we export a lot to the United States, at a certain moment you might have spare capacity in the south, but it would be pretty expensive to bring it to the U.S.,” Busain said.

AB InBev, based in Leuven, Belgium, completed its purchase of the half of Modelo it didn’t already own on June 4, setting up a Mexican showdown with Heineken. The Belgian brewer also sold Modelo’s U.S. business, including a Mexican brewery near the Texas border, as part of an agreement with the U.S. Justice Department.

Laura Vallis, a spokeswoman for AB InBev, didn’t immediately respond to e-mailed requests for comment.

Modelo, Mexico’s largest brewer, still has three breweries in northern Mexico, which according to Busain is Heineken’s stronghold.

“The coming years will be very interesting here,” said Busain, who has been in Mexico since early 2012 following stints in the Netherlands, France, Egypt, Burundi and Congo, the former Zaire.

Gaining Ground

Heineken has been winning back market share it lost to Modelo in 2011, according to Lauren Torres, an analyst at HSBC Holdings Plc. Modelo’s domestic volume slid 0.3 percent last year after climbing 6.1 percent in 2011.

“There were some mishaps in the first couple of years when they did lose some market share,” Torres said in a telephone interview from New York. “But as a result of new initiatives in marketing and distribution, they’ve gained it back.”

Marcela Cristo, a spokeswoman for Modelo, declined to comment.

Mexico’s Federal Competition Commission extended a deadline to decide whether exclusive beer distribution agreements held by Heineken and Modelo run afoul of the nation’s antitrust rules. A decision is now expected around the end of the month.

Antitrust Risk

In a worst-case scenario, a finding against the two beer giants could lead to an 8 percent volume decline in Mexico for Heineken and a 12 percent short-term drop in its Mexican earnings before interest and taxes, according to Trevor Stirling, an analyst at Sanford C. Bernstein in London. That could lead to as much as a 1.5 percent reduction in the Dutch brewer’s total earnings per share, Stirling wrote in a June 10 research report.

Heineken has been cooperating with the commission’s investigation, Busain said. He declined to comment on potential outcomes.

“If there would be a ruling that would dramatically change the rules of the game, we will be prepared to play the game according to these new rules,” Busain said. “That would be far less impactful to our business than a lot of people might assume.”

Heineken may adapt its U.S. marketing icon for Dos Equis, the “Most Interesting Man in the World,” to sell beer in Mexico as well, Busain said.

Beer Taxes

Busain said Heineken is watching closely whether beer taxes will rise as President Enrique Pena Nieto prepares to propose a tax overhaul in the second half of the year. Mexico temporarily raised excise duties on beer to 26.5 percent from 25 percent in 2010 with a plan to lower them to 26 percent in 2013, according to the Finance Ministry. The ministry said late last year that the rate wouldn’t be lowered this year.

An aide with the Finance Ministry’s press office declined to comment.

“It’s important for us, and I think it’s also important for the reputation of the Mexican government,” Busain said. “Further investments will absolutely depend on us knowing that we operate in an environment where they will not shoot from the hip.”

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