Food & Drink

Beer Fight: AB InBev vs. Guatemala's Brewing Dynasty


Beer Fight: AB InBev vs. Guatemala's Brewing Dynasty

Illustration by Vasava

The colonial city of Antigua in Guatemala attracts many American tourists. They roam the cobblestone streets, snapping pictures of the historic churches. They purchase unusual-sounding wooden flutes from street vendors. And in the evening they retire to bars and drink prodigious amounts of inexpensive beer. “Tonight these places are going to be packed,” says Roberto Lara, strolling through the city on a sunny day in February.

This should hearten Lara, a vice president of Castillo Brothers, a Guatemalan conglomerate that owns shopping malls, cemeteries, power plants, and the country’s largest beermaker, Cervecería Centro Americana, also known as Central American Brewery. Its signature product is Gallo, a lager that takes its name from the label’s imperious rooster. Gallo, 118 years old, is Guatemala’s most famous beer.

But something is bothering Lara, a boyish 35-year-old who once worked as an investment banker for JPMorgan (JPM) in New York and who speaks impeccable English. He enters a grocery store and makes his way to the beer section. The shelves are packed with newer stuff, much of it made by AB InBev (BUD), the world’s largest beer company. Until three years ago, you wouldn’t find the multinational corporation’s brands such as Budweiser, Bud Light, and Stella Artois in Guatemala. Now they are everywhere.

Lara is especially perturbed about Brahva, a pilsner that AB InBev brews locally and has positioned as a direct competitor to Gallo. He notes that a 12-ounce can of Gallo is selling for 7 quetzals—that’s 90¢. Meanwhile, you can pick up a 24-can pack of Brahva for 72 quetzals. Lara takes out his iPhone and performs a quick calculation. “That comes out to 39¢ a can,” he says. A can of Coke, he notes, costs 3.75 quetzals, or 48¢. “We’ve always wondered, how low can these guys go? Well, now they are selling beer for less than soda. That’s never happened in Guatemala before.”

AB InBev, with headquarters in Leuven, Belgium, doesn’t just want to sell lots of Brahva in Guatemala. It would like to buy Lara’s company and dominate the country entirely. To be precise, the suitor is Ambev, AB InBev’s Brazilian-based division, which operates in Latin America and Canada. Ambev is a separate company with its own stock, but AB InBev Chief Executive Officer Carlos Brito was once the head of Ambev and is co-chairman of its board.

Lara is a fifth-generation member of Guatemala’s powerful Castillo family, which controls Castillo Brothers, and he says they won’t be bullied by foreigners: “Our shareholders are really emotionally tied to the company and the heritage.”

The Guatemalan market may not seem like much of a prize. It’s a small country where half the population lives in extreme poverty, meaning many Guatemalans traditionally can’t afford beer. “Guatemala has one of the lowest per capita beer consumption rates in the world outside of Muslim countries,” says Emma Peterson, a Latin American analyst at Euromonitor International. Instead they drink cheap rum or aguardiente, a moonshine-like beverage whose name means “burning water.”

For Ambev, this means growth opportunities. Its price slashing has already triggered a beer-drinking explosion in Guatemala. In the past three years, annual sales have risen 42 percent to $664 million in 2013, according to Euromonitor. Eventually, Ambev hopes to extract $1 billion in annual earnings before income taxes, depreciation, and amortization from Central America and the Caribbean.

Guatemala is also strategically important to Ambev because it’s next to Mexico, where AB InBev controls Grupo Modelo, the maker of Corona. In 2012 the company announced its plan to swallow the portion of Grupo Modelo it didn’t already own. It boasted in an investors’ presentation that Mexico was the fourth most profitable beer market after the U.S., Brazil, and Japan. The last thing AB InBev needs is for Central American Brewery to sully its Mexican triumph by pumping more Gallo into Mexico.

But Ambev may not be able to achieve its dreams in the region without persuading the Castillo family to part with their empire. Ambev rules the Dominican Republic after purchasing a majority stake in the country’s largest brewery for $1.24 billion in 2012. But it hasn’t gotten very far in Nicaragua or El Salvador. And in Guatemala, even with the deep discounting, Ambev has only a 20 percent market share, according to Euromonitor. Almost everything else is in the hands of the stubborn Castillos. To hear Ambev tell it, the family has a distinct advantage as the local hero. “When it comes to the law and the government,” says Jean Jereissati, who oversees Central America and the Caribbean for Ambev, “we are the underdog here.”
 
 
The Castillos trace their lineage back to Bernal Díaz del Castillo, a Spanish conquistador who settled in Guatemala. The family became a force there when brothers Rafael and Mariano Castillo founded Central American Brewery in 1886. They traveled to Germany to buy beermaking equipment and hire a brewmaster. The return trip was worthy of a Werner Herzog movie: There was no road back from the Atlantic coast to Guatemala City, so they transported their fermentation tanks by steamship on the Motagua River and constructed their brewery on the city’s outskirts.

Much of their century-old beermaking operation has been preserved at the corporation’s headquarters in Guatemala’s capital. It blends in nicely with the rest of the place, which also has a museum-like quality. There are large busts of Rafael and Mariano in the lobby. Top executives toil in hushed wood-paneled offices. They are waited on by an in-house barista in a servile white shirt and vest. He makes a splendid espresso. Rafael and Mariano weren’t the only Castillo family entrepreneurs. In 1885 their younger brother, Enrique, started a soft-drink bottling company that would become known as Central America Beverage Co., or the abbreviated CBC.

The Castillos prospered despite the recurring turmoil in the country; generally the family was friendly with the government. Early on, political leaders allowed Central American Brewery to monopolize beer production.

It was more difficult for the Castillos to get along with one another. In 1942, CBC became the exclusive distributor of Pepsi-Cola in Guatemala. It was a coup for the soda-bottling clan. The brewing Castillos struck a similar deal 16 years later with Schweppes, a Pepsi competitor. Lara says it wasn’t a big deal. “We didn’t really compete with them,” he says. “We didn’t even have a cola. What did Schweppes have at the time? Orange Crush?” But the soft-drink Castillos never forgot the incursion.

The two sides of the clan occasionally did business together. They still jointly own a sugar mill in Guatemala. But the relationship became chillier in 2002 when CBC entered into a partnership with Ambev. Ambev would build a brewery in Teculután in western Guatemala. Together, they would make beer and distribute it. The soft-drink Castillos didn’t care that this displeased the brewing Castillos. “We are used to competition,” says Carlos Enrique Mata, the 55-year-old CEO of CBC and a descendant of Enrique Castillo. “We’ve always competed with Coke. They were used to being a beer monopoly.”

Ambev was still a regional brewing company at the time, but it was growing rapidly. In 2003 it expanded into Argentina by merging with Quinsa, the country’s largest brewer. Given its acquisitive nature, it was no surprise when Ambev politely asked the brewing Castillos if they wanted to sell. The brewing Castillos vowed to fight them in the marketplace. Naturally, they were livid with the soft-drink Castillos for inviting Ambev into Guatemala. “I don’t have any problem with them getting into a competing market,” says Lara. “This is something different. They are acting as an agent for Ambev, which is trying to force us to sell our company.” (Ambev denies that it offered to buy the company then.)
 
 
There’s a vintage Pepsi (PEP) vending machine in CBC’s office in a shiny new building in Guatemala’s financial district. It dates back to a time when a bottle cost a nickel. “It’s pretty cool, isn’t it?” says Ambev’s Jereissati.

The vending machine is the only nod to tradition. Ambev’s executives wear jeans. They don’t have offices, instead working at communal desks like Wall Street traders. CBC has embraced the culture. “They did it voluntarily,” says Jereissati. “In the Dominican Republic, we had to make them to do it.”

A genial guy with a beer aficionado’s paunch, Jereissati describes Gallo as a tremendous brand with a rich heritage. But Guatemalans want more choices, he says; that’s why the lighter Brahva is selling fast. “The taste profile of the consumer in Guatemala is changing,” he says. “They love Gallo, but it’s very strong. Everything the consumers are saying to us is, ‘We prefer Brahva.’”

Jereissati’s natural ebullience diminishes as he talks about competing with Central American Brewery. He suspects that the owners have used their political connections to thwart his company. “They close every door,” he says.

It may be a stretch for an executive at the world’s largest beer company to claim underdog status, but there’s something to his lament. As soon as Ambev entered the Guatemalan market, it ran into trouble. In 2002, CBC’s Mata says, Central American Brewery appealed to then-President Alfonso Portillo for assistance in frustrating its foreign rival. “They went to the president and said, ‘Don’t let them bring the machinery in here,’” he recalls. He says Ambev’s silos and cooling tanks sat in a warehouse for six months until lawyers got a court order for their release. The brewing Castillos say they have never tried to use their political connections to wound competitors. “That’s bulls-‍-‍-,” says Lara.

CBC says the Guatemalan Ministry of Public Health and Social Welfare took extra time to approve Ambev’s beers while fast-tracking Central American Brewery’s new products. Lara insists his company had nothing to do with this. Instead, he says, Central American Brewery competed fairly in the beer market and sought to punish CBC by pushing Super Cola, a low-price Pepsi competitor, in 2003. “We got a huge share of the market,” he brags. (CBC says it’s still the main cola distributor in Guatemala.)

According to Lara, Ambev became frustrated and offered to sell its Guatemalan brewery to Central American Brewery in 2005. Lara says the beermaking Castillos were amused by this turn of events; Ambev responds, “This never happened.”

Both parties agree that Ambev became more aggressive in 2008, the year InBev acquired Anheuser-Busch in a $52 billion hostile takeover, creating AB InBev. As a result, AB InBev wound up with a 50 percent stake in Grupo Modelo.

In 2011, Ambev started lowering the price of Brahva and its sister brands. The same year it made its offer to buy Castillo Brothers. Richard Aitkenhead, a local investment banker hired by Ambev, says he discovered that members of the brewing family were selling their shares privately for $300 each. Using that number, he estimated that Castillo Brothers was worth $1 billion.

“Now they are selling beer for less than soda. That’s never happened”

Lara says his family thought the figure was ridiculous. Aitkenhead recalls the conversation differently: “They said, ‘No, the value is at least $700.’ ” Aitkenhead obligingly increased the offer to $2.1 billion, or $700 a share. The management of Central American Brewery rejected that offer, refusing to present it to the shareholders. So Aitkenhead says he went directly to family members. There are more than 1,000 in the family corporation. He says some were interested in cashing out. Ambev says there was no direct solicitation of Castillo family members.

“It was an attempt against the family,” an angry Lara says. “They were trying to divide the shareholders.” Castillo Brothers management responded by adopting new bylaws requiring any outside stock sales to be approved by a shareholder committee. That would fend off a takeover attempt by Ambev.

Unfortunately for management, some familiar shareholders took exception. Years ago, a man on the soft-drink side of the Castillos had married a Castillo on the brewing side. Their daughter inherited the shares of Castillo Brothers. She was Mata’s grandmother. As a result, the chief executive of CBC and his family ended up with about 1 percent of Castillo Brothers shares and access to confidential stockholder information.

In 2012, Mata’s brother Oscar Guillermo successfully sued Castillo Brothers to suspend the new rules restricting stock sales. The brewing Castillos are challenging the decision and have since created a holding company that controls the family corporation, excluding the soft drink-producing relatives from becoming members.

In the wake of its failed acquisition, Ambev is doing more than slashing prices. It has been giving free trucks to beer distributors who move lots of Brahva. Also, Lara has noticed retailers selling cases of Brahva with a 2-liter bottle of Pepsi attached. “They are just doing crazy stuff,” he says. Ambev says it’s not involved in the soda giveaways.

Mata says his Gallo relatives are the ones behaving strangely. He sees their influence in the Guatemalan Health Ministry’s fining Ambev last year for running soccer-related advertisements without government approval. Mata thought the ads were perfectly legal. The brewing Castillos scoff at the charge.

It wouldn’t be the last time the Health Ministry cracked down on Ambev. Last year the ministry ruled that AB InBev didn’t have the right permits to sell Corona; AB InBev appealed. The Guatemalan Constitutional Court overturned the decision and ordered the ministry to fire two of the employees involved in drafting the order. A Health Ministry spokesman referred questions to the judge in the case.

Jereissati says Ambev has already won a larger victory: It’s opened up the Guatemalan beer market. In 2003, Gallo accounted for 89 percent of all beer sales. Now its share is 63 percent. Brahva, meanwhile, has leapt to 20 percent. Now Jereissati has to find a way to raise prices. “I don’t think they are making any money,” says Euromonitor’s Peterson. Jereissati disputes this but declines to provide figures.

In early February, Jereissati visits a high-end supermarket in Guatemala City. He inspects his company’s displays in the meat department. “This is a good place to be,” he says. “This is where people make their decisions about what they are going to barbecue.”

He’s confident that Guatemalans, especially the wealthier ones who shop in a place like this, will buy these imports even if they are more expensive than Brahva. He gestures toward a stack of Stella Artois. “This one’s aspirational,” he says. Then he walks over to a Corona display. “That one’s more relaxing.”

It’s good Jereissati’s optimistic about his company’s products; he doesn’t see much hope for Ambev’s campaign to buy Castillo Brothers. That would mean the brewing Castillos and the soft-drink Castillos might have to work side by side. “They hate each other too much,” he says.

With Isabella Cota
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Leonard is a staff writer for Bloomberg Businessweek in New York.

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