In Mexico, beer sales are latest battlefield against country’s giant monopolies

09/09/2013 3:30 PM

09/09/2013 7:36 PM

Pablo Flores has big dreams for his tiny craft brewery, which produces smooth golden and brown ales in bottles with dandy labels.

“We’d like to be all across the republic, in every state,” Flores says.

But for now, his brewery, Cerveceria Albur, has a more mundane challenge – getting a spot on the menus of restaurants and a place on supermarket shelves in Monterrey, northern Mexico’s industrial hub.

Dozens of small craft brewers are popping up in Mexican cities with flashy bottles and catchy names like Atomica, Border Psycho and Primus. Together, however, they have less than 1 percent – 0.64 percent to be precise – of the market. That’s because two behemoths control 98 percent of the beer consumed in Mexico, employing tactics that lock out most newcomers.

As Mexico tries to bust open some of the monopolies and concentrated economic power that stifle its economy, attention has focused on the conglomerates that control television and fixed-line and cellular telephones. Yet beer is another area that has been sharply restricted for decades. The market only now is opening slightly, serving as a litmus test for whether anti-monopoly regulators under President Enrique Pena Nieto will act more aggressively. So far, signs are mixed.

Barely any microbreweries existed in Mexico a decade ago. At a gourmet trade show last week in Mexico City, 56 craft beer makers showed up, many of them in business for only a year or two.

Still, Mexico lags far behind other countries in making craft brews.

“In the U.S., there are around 2,500 microbreweries. In Chile, there are 250,” said Jaime Andreu Galvan, one of the partners in Cerveceria Primus, a microbrewery that launched in 2006.

Even so, Mexicans are thirsty for beer. The nation is the sixth-largest consumer of beer in the world. In hotter parts of the country, beer is often considered a substitute for soft drinks. Mexicans on average down 16.3 gallons of beer a year.

Many beer brands crowd the shelves, but they belong to one of two companies, Grupo Modelo in Mexico City or Cerveceria Cuauhtemoc Moctezuma in Monterrey.

Now the issue has become global. Huge foreign brewers have acquired both of Mexico’s big brewers. In 2010, Heineken, the Dutch firm that is the world’s No. 3 brewer, bought Moctezuma and its brands (including Indio, Dos Equis, Tecate and Sol), which have 41 percent of the market.

Earlier this year, Belgian-based AB-InBev, the world’s biggest brewer, gobbled up Grupo Modelo and its brands (including Corona, Modelo, Pacifico and Victoria), with 57 percent of the market.

The two goliaths inherited practices that include enticing clients to sign exclusivity contracts by providing them with refrigerators, tables and chairs, and display awnings with their own beer logos. In some cases, the brewers would even advance money to new cantinas and restaurants – up to the equivalent of tens of thousands of dollars – in exchange for a cut of future beer sales.

The practice that is most heavily criticized, though, particularly in the north, is the big brewers’ ownership of all permits to dispense or sell beer.

“If a small retailer goes to ask for a permit, the municipal agent sends them to the breweries,” said Armando Valenzuela Gaxiola, the managing director in Mexico of SABMiller, the London-based giant that is the world’s No. 2 brewery.

“They say to you, ‘No, the permits are all out,’” added Andreu of Cerveceria Primus. “That’s how they hold a gun to your head.”

It’s enough to drive craft brewers loco.

“When I go to restaurants, they often say to me, ‘I have an exclusivity contract. I can’t even talk to you,’” said Isaac Aroche, the beer master and general director of La Chingoneria, a small craft brewery in Mexico City.

Other aspects of the beer market conspire to keep it closed. For example, the market for malt, a key beer ingredient, is controlled by the big breweries. Big players also have their own glass factories and bottlers.

In a curious twist, a couple of Mexico’s earliest microbreweries, Primus and Minerva, saw their interests coincide with those of the third major global brewery, London-based SABMiller, which also wanted to enter the domestic market.

In 2010, SABMiller filed a complaint with Mexico’s Federal Competition Commission against what it described as the monopolistic practices of the two dominant companies. Primus and Minerva joined the complaint.

On July 11, the commission issued a ruling, offering a partial victory to the craft brewers. It said the dominant brewers had to limit their exclusivity contracts to no more than 25 percent of their points of sale, releasing most cantinas, bars and restaurants to sell craft beer. The ruling is to go into effect within 90 days.

The commission didn’t offer much help to SABMiller, though, which filed a federal court appeal and declared that the ruling “failed to truly address the monopolistic activities of the two dominant brewers.”

“We are going to be excluded from nightclubs, cantinas and bars, hotel chains and arena events,” said Valenzuela, the SABMiller Mexico executive.

Moreover, most convenience stores remain off limits to both Miller products and craft beers. OXXO, a chain with 11,000 convenience stores in Mexico, has cross-ownership with Heineken.

Craft brewers see convenience stores as part of an eventual growth arc.

“In the U.S., if you go into a 7-Eleven you’ll find Miller Lite but also Stone and Dogfish,” said Sergio Elias Gutierrez, an owner of Bocanegra, a microbrewery here, referring to two regional U.S. craft brews.

Further anti-monopoly efforts are in the offing. As part of a sweeping move to bust up monopolies in telecommunications that went into effect June 10, President Pena Nieto will install a new Federal Economic Competition Commission with more teeth. It will replace the previous commission.

Microbreweries still have many complaints, including taxes of 45 percent on their suds and regulatory limits that define craft breweries as those producing less than 100,000 hectoliters (2.6 million gallons) a year, giving any craft brand a maximum of 0.15 percent of the national market.

The Brewers Association, a Colorado-based group representing U.S. craft brewers, is watching developments in Mexico carefully.

“Artificial barriers like exclusive contracts that bar other suppliers from competing are harmful to the beer consumer,” Bob Pease, the association’s chief operating officer, wrote in an email. “If the playing field is level and all suppliers have access to market and the beer drinker gets to decide, we like the chances of the small and independent brewer.”

Even as Mexico’s newest brewers rejoice at what Andreu called “the first big victory,” beer makers say they face sharp disadvantages as they try to win the hearts of beer lovers.

“We can’t provide the same kind of incentives to restaurants, like refrigerators,” Flores said. “It affects you if you can’t provide these things.”

“We first have to teach people about good beer,” echoed Aroche.

But Andreu, who is a leader of a national microbrewery group, the Brewers Association of the Mexican Republic, remains optimistic.

“Our goal by 2016 is to arrive at 1 percent of the market. In the U.S., microbreweries have 6 percent of the market,” Andreu said.

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