Big Brewers Pour Into Emerging Markets

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Brazil: The Brazilian beer market continues to present significant growth potential compared with more mature markets (e.g., Western Europe), both in terms of per capita consumption (49 liters per year, compared with the European average of 78 liters) and in the development of the premium segment (6% of total beer sales, compared with 15% in the U.S. and 33% in France). We expect continued economic stability in the country, and with it, decreasing unemployment rates, a greater transition of informal workers to formal/contracted jobs, and higher credit availability at lower interest rates (a relevant growth factor for both durable and nondurable goods consumption in Brazil). This should result in further progress in several aspects that affect beer consumption in the local market. These gradual improvements in consumers' purchasing power and disposable income should continue to support above-average beer volume growth rates in the next few years.

We expect AmBev (ABV) to remain the dominant player in Brazil (with market share in the 67% to 70% range), as competitors struggle against its very efficient operations and strong portfolio of brands. However, the market should remain highly competitive over the next few years, as FEMSA Cerveza attempts to establish a footprint after the 2006 acquisition of Cervejarias Kaiser Brasil from Molson Coors (TAP; BBB), which was followed by significant investments in operations and marketing (including the launch of a new brand). Other small players, such as Cervejaria Petrópolis (unrated) and Grupo Schincariol (unrated), will continue to seek ways to further improve their portfolio and brand positioning.

Chile: Although the Chilean beer market is relatively small compared with other markets in the region, it continues to present attractive growth potential in terms of per capita consumption (33 liters, vs. 90 liters in Spain) and in the development of premium brands. In 2006, beer consumption increased by about 14% (measured in liters, compared with 2005) and about 6% during the first quarter of 2007, continuing the growth trend started in 2003.

Despite increased competition, Compania Cervecerias Unidas (CU) is expected to remain the dominant player (with about an 89% market share). In 2006, CCU's beer volume sales increased by 13.1% in Chile and 12.9% in Argentina. We expect pressures over margins to continue, mainly on a more aggressive strategy from Cerveceria Chile (part of AmBev), the second-largest player in the market.

Mexico: The Mexican market is the world's eighth-largest by volume and also is essentially a duopoly market: Grupo Modelo (unrated) controls more than one-half of the market, and FEMSA's share is about 44%. From 2002 through 2006, the Mexican beer market had a compound annual growth rate of 3.4%, and we expect it continue at that level given the large young population, relatively low per capita consumption (estimated at 54 liters per year), and the developing economy. In the near term, brewers will focus on improving customer relationships across the distribution network, adjusting pricing policy to maximize revenue generation, and providing continuous innovation of products.

Industry participants will continue to focus on the growing U.S. Hispanic market, particularly in the southern U.S. An example includes Grupo Modelo's new joint venture with Constellation Brands (STZ; BB-) to import and market Modelo's Mexican beer portfolio throughout the U.S. and Guam for 10 years. We believe the U.S. market will continue to provide growth opportunities, but will also remain a challenge because of the differences in market dynamics.

Stout is a credit analyst for Standard & Poor's Ratings Services.