Bloomberg News

Mexico's Modelo Boosts Spending 17% to $700 Million

April 25, 2008

Grupo Modelo SAB (GMODELOC), Mexico's largest brewer, boosted spending plans by 17 percent to $700 million this year, Chief Executive Officer Carlos Fernandez said.

Modelo, the Mexico City-based maker of Corona beer, intends to increase marketing and improve distribution with the additional funds, Fernandez said today on a conference call. Yesterday, the company said first-quarter beer exports fell 7.7 percent because of the U.S. slowdown and after it raised prices.

The brewer expects a recovery in sales to the U.S. and maintained its 2008 target of low-to-mid single-digit growth on a percentage basis for beer exports, Jose Pares, director of Modelo's international markets, said on the call without elaborating. About 80 percent of exports go to the U.S.

``We have numbers that are connected to the market that are really telling us that trends are changing and improving,'' Pares said, citing data the company receives from wholesalers.

Modelo fell 99 centavos, or 2.1 percent, to 45.62 pesos in Mexican stock exchange trading. The stock has dropped 11 percent this year.

Sales to the U.S. slumped after a price increase in the first half of last year that competitors didn't follow.

In 2007, Modelo increased export prices an average of 5 percent, while leaving domestic prices unchanged. On Jan. 10, it raised domestic beer prices about 4 percent to keep up with Mexican inflation and didn't change what it charges for exports.

It takes about 12 months for sales volumes to rebound after a price increase, Pares said.

Higher Material Costs

Costs for barley, wheat and aluminum used in cans climbed in the past year, hurting brewers' earnings. Modelo's first- quarter profit dropped 14 percent to 2.07 billion pesos ($197.9 million) from a year ago as exports fell and expenses increased.

Modelo's operating-income margin this year may decline 30 to 50 basis points from 2007, down from an earlier projection of the margin being little changed from a year earlier, Fernandez said.

The company is building a $520 million plant in the state of Coahuila near the U.S. Mexico border that will take part of the 2008 investment. Modelo also will spend an additional 600 million pesos to implement a software network that provides information on beer sales and distribution.

Anheuser-Busch Cos. (BUD:US) partly owns Modelo and reported April 23 that first-quarter profit fell 1.3 percent on higher costs and a drop in earnings from its stake in the Mexican brewer.

To contact the reporter on this story: Thomas Black in Monterrey at tblack@bloomberg.net

To contact the editor responsible for this story: Michael Nol at mnol@bloomberg.net.


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