Mr. Fernandez, Grupo Modelo is offering its products in more than 150 countries worldwide. You are one of the few Mexican companies which started to distribute its products abroad, long before Mexico signed its free trade agreements with other countries. Did you want to become more independent from the domestic market or did you already have in mind that one day Mexico was going to be in the middle of worldwide trade, as it is today?
First of all, I think the idea of operating abroad was that for several years, all the company's profits were invested in the company's expansion. So, our shareholders really didn't receive their dividend, but everything was invested. We have a company policy: to be a debt-free company. So, everything we do inside the company, all the products and investments are done with our own resources. Based on that, we saw that we had very good technology, that as a result of those investments we had a very good distribution network in Mexico, that we had very good quality products and this was our foundation to offer a product abroad. During the '80s, in America, we began talking about GATT. As that was happening we realized our need to go abroad and work in other countries. So our chairman, Don Antonino Fernandez, asked our people in sales to sort of prepare a strategy to export from Mexico. We did have certain exports going to the USA in the past, but not on a regular basis. A couple of boxes were sent once every three months. We didn't have any control or promotions. Besides, the product we were selling was a beer in an amber bottle, which is traditional here in Mexico. After deciding the strategy, we began sending our product to the west, to California (to the beach, some restaurants and bars with young customers). Most of those, in a certain way, came to Mexico and had a lot of fun in Mexico. When they went back to their town they remembered all the fun they had drinking our product. What happened is that we began being well seen by these teenagers "yuppies". Most of them, in the beginning, were surfers that went to Los Cabos or any other Mexican beach. When we saw that our product was present in many local places and people asked for it, we did a lot of promotion. In the beginning, we were not a threatening product, we were just seen as a Mexican product. Most of our brewmasters were very disappointed, because they didn't like the idea of having the body of our beer with a line, so they asked our chairman and our operations manager to try to take that off. They said, "We are spending a lot of time and effort selecting the raw materials, so let's continue the traditional line". We were not successful in that, so we stopped doing that. We still promote the beer with a line. At the end, we began doing advertising. In the beginning, we signed an agreement with a distributor in Chicago, Barton. Later on, a former sales division manager of Grupo Modelo created a new company in San Antonio and we signed with him and today, we have two distributors in the USA. The USA currently represents more than 85% of our sales in the export market. And between the USA and Canada, it's more than 90%. We are very happy with the development there. Afterwards, most of foreigners, who went to the USA and tasted our products, went back to their countries and asked for our beers. I think that was basically the idea in the beginning and now we are concentrating on that.
As a matter of fact, such brands as Corona are as well quite successful in Europe. It is known in Europe through its image and through the price. Do you agree if I say, your success abroad is based not only on the image of an exotic holiday beer but also on a special price strategy?
I think it is part of the overall strategy. We couldn't talk about having the beer outside, it was kind of difficult to think we were going to have the same price as our competitors in the USA that have been in that market for many years. We said "We're going to be a premium brand and we are going to be expensive." Most board members thought it was nonsense and it wouldn't work. Bust most of us believed in it and it just happened. It doesn't have to be cheap because it's a Mexican product. We know how to do the right thing. Based on that, we created a slogan 3 years ago "Quality has no borders" or "Quality defies borders." With quality you can open any market to your products. That's part of a flag we placed here in Mexico. We are proud as Mexicans to have such a successful product. Obviously, the USA and Canada helped a lot to open other doors but I believe being in a clear bottle with a unique image, we obviously broke the usual standards. Most people said "You can't have a beer in a transparent glass bottle," but we proved we could. You can study that trend, we were heavily criticized in '84 and after '87, mayor brewers began bottling their beers in a clear glass bottles. The other key factor was selecting the right distributors.
In the Mexican beer market, you are the market leader, having only one big competitor. What is your current output in hectoliters and your share of the domestic market and where do those figures place Grupo Modelo on a global scale?
On a global scale I would say we're number 8. Our output is over 25 million hectoliters. Based on that, our trend has given us a very good position as a company that has very good demographics and a great profile for future growth. This means more than 25 million hectoliters are sold in the country and more than 7 million hectoliters abroad, these are last year's numbers. This year, we're expecting to reach an overall capacity of 35-36 million hectoliters. Of that, 22 percent would be exports. We are continuing to sell most of our products locally. Currently, we have a domestic market share close to 55% and 33% of the global market. When I go to the breweries and our wholesalerships, I tell them to imagine that out of 100 bottles of Mexican beers sold abroad, 83 are ours. This is to show us our preference abroad and that we should continue with our core business which is the production and distribution of beer.
Today, in order to be competitive, many companies follow fusion strategies. Do mergers by other breweries represent an increased competition for Grupo Modelo?
We have always been in different stages during our development as a company. We were founded 75 years ago this October. We were the youngest brewing company in Mexico. There were highly recognized companies with an established market and a lot of resources to invest. When we arrived everyone asked themselves "Who is going to buy Modelo?" During that time, we fought very heavily and, as a matter of fact, what we began to do as a first step was to buy a brewery in the State of Mexico, we closed that facility and incorporated its brands to our portfolio and then we invested in others in northern states of Mexico, we bought others in Jalisco and Mazatlán. Then we invested in a joint venture with a family in Ciudad Obregón closing most of its facilities and keeping one of those breweries, the last one was when we bought Cervecería Yucateca in Mérida. At the end, we control 8 breweries, 3 of which are regional and came from that consolidation in the market. That gave as a result 9 brands: 4 national and 5 regional. With that in mind, obviously the consolidation has become more active in the recent years, but this doesn't mean consolidation has not been happening in the last 40 years. You can see that with Heineken, that has been a very good job for many years. Probably during the '80s you may remember the Australian group which began making certain consolidation Elders, now it's Fosters. At that time, Elders did a lot of movements buying some companies in Asia and in Canada. What I'm trying to say is that consolidation works when you enter a market where the demographics show you growth. You can consolidate a lot but if you consolidate in places where growth isn't going to be very good, you're not going to have good returns, you don't have all the raw material you need or all the supply chain aligned, that's going to put you in a very tough position. | And regarding Interbrew's intention to make a public offering by the end of this year, what is going to be Grupo Modelo's reaction?
Well, it can happen. Every move that is done by anyone within the 30 most important breweries in the world is studied very carefully. Obviously, Interbrew is doing a very good job buying, no one really knows the numbers for sure. Once they come public, our doubts will be answered and we'll be able to respond. I believe Interbrew is going to be a very heavy player, Heineken is also moving very fast. Most of those companies that are public are the ones more concerned on returns on their shareholders and we should watch their decisions very carefully. If they aren't investing, there's probably a good reason.
Several statistics show that the average beer consumption per capita in Mexico is still around 50 hectoliters, compared with countries such as the USA, Germany, the Czech Republic were these figures range between 80 and 160 hectoliters. Will it be a priority for Grupo Modelo in the near future to focus on the domestic market in order to increase domestic consumption?
Obviously, most of our efforts look at the future of the company. We're going to make them in Mexico. We released information at the beginning of the year that we would invest more in one of the breweries in the State of Oaxaca, that we will continue investing in Zacatecas and so forth. Basically, during the year we are planning to invest around 350 million dollars. That's a lot of money for investing in Mexico but we believe Mexico is a good place to invest in. Another way to look at it is, once again, demographics. Mexico is a very young country. The population less than 18 years old is 46%. At 18, a civilian has the right to drink. Annually, 1.5 percent becomes of age. That's a lot of potential customers for us. We look at it as a very good opportunity for growth and to increase our annual consumption per capita. We consider beer as a moderate drink. We support many moderate-drinking plans.
What is the PR strategy and what are the sums planned to invest, in order to approach the new clientele?
It's difficult to say. After 18, everyone is a potential client. We are very interested in young people. We try to place our publicity in places with certain regulations. We issue certain ads attractive to them in nightclubs and bars to attract them. That's part of the marketing activities that most of the companies in our sector do. We have been investing 7% of our sales in marketing and we will continue to do so.
As you mentioned before, Grupo Modelo is planning to expand its production in Oaxaca and Zacatecas. What would be the final capacity of those plants and how would the extra capacity be balanced between the domestic and the export market?
Between 25 to 30 per cent of our production in the next 5 years would be dedicated to exports. In 2004, we'll reach a capacity of 60 million hectoliters. Remember that Mexico has cycles. During certain months of the year the facilities will be at 100% of their capacity, but other months are slower. What we are trying to obtain is the balance formula for capacity and 85% of our capacity is very good for us. That makes us comfortable.
Taking into account, that the annual domestic compound volume growth is expected to increase at a rate of 4,2% for the upcoming five years, while on the export market an increase of 12% is expected, shouldn't you focus even more on the export market?
Exports are part of the business, but it's not the big part of the business. Remember we produce 100% of our product here. Secondly, a four per cent increase in Mexico is a lot. On the other hand, we've had a compound annual growth rate of more than 20% in exports in the past five years. Once you get into a niche and once you enter a market, it's tougher to grow the volume and the competition gets tougher. Everyone is investing in marketing, promotion, etc. The channels are also more or less completed. Let's say if you want to get into a supermarket, if you are fortunate enough to be in their brand portfolio, you are put in a shelf and that's it. You cannot grow more. The other way that you can do it is entering in restaurants but it's difficult in the USA. In other places, you drink a beer and then some wine. It's a challenge, it's not easy. In Mexico, the beer culture is considered to be a domestic product and everyone likes beer. We consider we have a lot to do in Mexico.
Mexico has the advantage of having a global network of free trade agreements. We expect Mexico will soon sign a FTA with Singapore and continue to do so with other potential candidates such as Japan and Korea. What are your current activities in Asia and how do you think Grupo Modelo would benefit from those trade agreements with Asian countries?
Asia is a place of a lot of opportunities. You have big markets with a lot of opportunity and other smaller ones, it has everything. So far, we are selling 3 percent of our exports to Asia. If you, for example, see China, it's large but it's not a market for expensive beers. We are selling there but in hotels and in high acquisition power locals. It's difficult to buy a Corona for 6 or 7 dollars. Nevertheless, we are doing pretty well. We are happy with our results in Singapore. Asia has a great potential but it's also a very long trip and the distributors have to pay certain taxes. In some places, distribution is managed by the brewers themselves who are not too interested in investing on promoting foreign competitors. There are a couple of culture barriers we have to overcome.
What would be the main assets of Grupo Modelo, which allow the company to enter successful new markets? Which priority would you give to the following four ones: Human Resources, experience, a successful PR policy, advanced technology?
I would say that human resources is number one. Experience would be the result of a combination between youth and tradition. It's kind of a blend. For example, our Chairman is 84 years old, our Vice President (Don Juan Sanchez Navarro) is 80, another of our Vice Presidents was 90 (he passed away a couple of months ago). They keep in touch with us here in the company and we have meetings with them and we exchange their experience and input based on their traditional ways. We are always trying to achieve a new record and this blend seems to work great. One that you are missing as a main asset is probably the key factor quality, without it, we could do nothing. It comes as a result of advanced technology with human resources. Commitment is also very important. Besides, the people's commitment is highly important.
In your opinion, what is going to be the impact of the results of July's elections for Mexico in general and for Grupo Modelo's future?
I believe that if we continue with our policies and not drifting to other products or issues, we'll be fine. Every year something is mentioned about taxes, labor or whatever. Now this is more profound because this government has to do something new not to bring us down. I think it's going to be positive but every Mexican has to realize things can't be done without the public's participation. I don't mean politics or policies, I mean working to build a better Mexico.
Mr. Fernandez, would you tell our readers what is the favorite beer brand of Grupo Modelo's CEO?
Negra Modelo is the best. I like every single one of them but Negra Modelo is the one I drink. |
Grupo Modelo