Mexican Beer Ruling Said Imminent as SABMiller Seeks RoleClementine Fletcher and Brendan Case
SABMiller Plc passed on buying almost half the Mexican beer market in 2010 when Heineken NV struck a
5.3 billion-euro ($6.9 billion) deal to acquire Fomento Economico Mexicano SAB’s brewing unit.
So when global industry leader Anheuser-Busch InBev NV claimed most of the rest by paying $20.1 billion for full control of Corona maker Grupo Modelo SAB, SABMiller was left needing help from regulators to gain more than a toehold in the world’s sixth-largest brewing space.
With nothing left to buy in the country, the London-based company is waiting for an imminent antitrust decision that may free up a small amount of market share. At SABMiller’s behest, Mexico’s competition authority has been examining whether exclusive contracts that Heineken and AB InBev have with shops and restaurants prevent others selling in outlets that Barclays Plc analysts estimate represent 85 percent of market volume.
“It’s an opportunity for SABMiller to grow, but a long-term one,” said Melissa Earlam, an analyst at UBS AG in London. “It’s very hard to second-guess the quantity of change the regulators could impose.”
The Federal Competition Commission, which delayed a decision June 3, has made a ruling and may notify those involved as early as this week, according to three people with direct knowledge of the matter. If SABMiller is successful with its second official complaint that the current status quo is anti-competitive, it could loosen AB InBev and Heineken’s control over a market that Banco Santander SA values at $6.6 billion. The brewer’s initial complaint was rejected in 2007.
SABMiller rose as much as 2 percent to 3,180 pence and was trading up 1.8 percent as of 11:01 a.m. in London. AB InBev gained 0.8 percent to 67.40 euros in Brussels, and Heineken increased 1.5 percent to 50.39 euros in Amsterdam.
Mexico is a gap in SABMiller’s coverage of emerging markets, which account for about two-thirds of earnings. That’s more than either Heineken or AB InBev. Weakening consumption in Europe and increased competition from craft brewers in the U.S. means that developing countries are playing an increasingly important part in the strategy of global brewers.
With about 1 million people reaching drinking age per year, Mexico is a prime target for brewing investment. The country’s economy is set to grow 2.9 percent this year and 4 percent in 2014, compared with the U.S.’s 1.9 percent and 2.7 percent, according to forecasts compiled by Bloomberg.
Barclays estimates that AB InBev’s Modelo has 55 percent and Heineken 43 percent of Mexican beer volumes, compared with SABMiller’s 1 percent. Their domination is down to the brewers’ intertwined connections with retailers.
A possible outcome of the Mexican review is that Heineken loses exclusive distribution through the Oxxo convenience chain owned by Fomento Economico Mexicano, or Femsa, the company from which it bought its beer business in the country. Modelo may also be ordered to sell different brands at its stores, while exclusive contracts with so-called mom-and-pop convenience shops, a backbone of Mexican beer sales, could be rejigged, said Trevor Stirling, an analyst at Sanford C. Bernstein in London.
SABMiller won’t comment until after it receives a final decision from Mexico’s competition commission, spokesman Richard Farnsworth said. Marcela Cristo, a spokeswoman for Modelo, declined to comment, as did Heineken spokesman Hugo Loya.
Whatever the outcome, SABMiller may still struggle to make inroads against rivals with such a stranglehold on the market.
Any regulatory change “is not going to fundamentally change the landscape,” said Stirling. He estimates that the maker of Peroni is unlikely to do better than gain “a couple of market-share points.”
While Heineken has exclusive distribution rights in Oxxo stores, the largest convenience-store chain in Latin America, Modelo controls its own chains, Modelorama and Extra. Smaller stores also turn to the biggest brewers for the “loan” of expensive licenses to sell beer, or directly borrow money to buy licenses on condition of selling the loaning brewer’s brands exclusively, according to Sanford C. Bernstein.
Heineken is likely to be the biggest loser if the Mexican market changes, said Anthony Bucalo, an analyst at Santander in London, especially after AB InBev completed the deal to take full control over Modelo last month.
“We believe AB InBev would win most mano-a-mano execution fights with Heineken,” Bucalo said. “Scale and financial resources matter in beer. ABI has significantly more of both in Mexico and will likely have more in the future.”
Ending exclusivities may provide a short-term fillip to profit at Heineken and AB InBev, which Bucalo estimates pay about $100 million to $150 million a year for the privilege. Still, profitability may narrow again in the longer term as the brewers invest in advertising and promotions to protect share.
For SABMiller, the cost of establishing a presence in Mexico may be greater as the brewer would have to build breweries and brands.
Even if the competition commission does attempt to open the market, “it’s not an easy road, and it’s not going to be free” for new competitors, Armando Valenzuela, head of the company’s Mexico unit, said in an interview earlier this year.
Any change would be positive for Mexican drinkers, Bernstein’s Stirling said. The brewer could bring brands including Miller Genuine Draft to Mexico, giving consumers more choice. Craft beers -- so beloved of Americans just across the border and now made by more than 30 Mexican microbrewers -- could gain more traction.
“If exclusivities get banned, it’ll accelerate the evolution of the Mexican market towards a more brand-led one,” Stirling said.