Grupo Modelo, S.A. de C.V.

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Grupo Modelo, S.A. de C.V.

Campos Elíseos 400
1100 Mexico City, D.F.
México
(52) 5-282-2122
Fax: (52) 5-281-1308
Web site: http://www.gmodelo.com.mx

Public Company
Incorporated: 1925 as Cervecería Modelo, S.A.
Employees: 41,149
Sales: 15.52 billion pesos ($1.93 billion) (1997)
Stock Exchanges: Mexican
Ticker Symbol: GMODELOC
NAIC: 31212 Breweries; 322212 Folding Paperboard Box Manufacturing; 311213 Malt Manufacturing; 327213 Glass Container Manufacturing; 332431 Metal Can Manufacturing

Grupo Modelo, S.A. de C.V. is the largest beermaker in Mexico, holding 55 percent of the national market in 1998, when it was the 12th-largest beer producer in the world and the most profitable brewer in Latin America. Its best known brand is Corona Extra, a light brew that ranked first in sales among beers imported to the United States in 1997 and fifth in the world in total production. The company also produces nine other brands of beer. A holding company, it is vertically integrated, beginning with its overseeing of the selection of seeds and germination of hops, and including brewing and bottling plants and distribution by trucks and ships. Grupo Modelo was, in the late 1990s, 50.2 percent owned by Anheuser-Busch Cos., the world’s largest beer-producing company, and it was the exclusive importer of Anheuser-Busch’s products in Mexico, including Budweiser and Bud Light. Anheuser-Busch did not, however, hold a majority of Grupo Modelo’s voting shares.

The First Fifty Years

Beer was the basis for the holdings of the Sada and Garza extended families, whose Monterrey Group became the most powerful business combine in Mexico. Cervecería Cuauhtemoc was founded in Monterrey in 1890. Its chief rival was Cervecería Moctezuma, founded in 1894. Cervecería Modelo, which eventually outstripped the other two in production and sales, was founded in 1925 in Mexico City by Braulio Iriarte, with the help of President Plutarco Elias Calles.

Cervecería Modelo soon came under the control of Pablo Diez Fernández, who became its director general in 1930 and its majority stockholder in 1936. Born in Spain in 1884, Diez Fernández emigrated to Mexico at the age of 21 with money he borrowed from the Dominican fathers under whom he studied. He first worked as an accountant for a bakery, established the first mechanized bakery in Mexico, and then became part-owner of the first yeast factory for bread in Mexico. He went on to become co-founder and major stockholder of Celanese Mexicana in 1944 and a director of Banamex, one of Mexico’s largest banks,

Diez Fernandez kept Modelo a private company that financed its expansion into producing malt, bottles, bottle caps and corks, and cartons through earnings rather than borrowing. He also acquired the regional breweries producing Victoria (1935), Estrella (1954), and Pacífico (1954). Modelo spent heavily on advertising during the late 1940s and early 1950s, much more so than its rivals. By 1956 it was the leading brewer, passing Cervecería Cuauhtemoc and Moctezuma, with 31.6 percent of total beer production in Mexico. Modelo established plants in Ciudad Obregón (1960), Guadalajara (1964), and Torreón (1966) and created a national distribution network. Antonio Fernández Rodríguez, also Spanish-born, succeeded Diez Fernández as director general of the firm in 1971. Under his leadership, Modelo’s share of the Mexican market grew from 39 percent in 1977 to 45 percent in 1985.

Seizing the U.S. Market in the 1980s

Fernández Rodríguez set his sights on the U.S. market by adopting a U.S.-style bottle for Corona, but the brand ran into trouble because a Puerto Rican beer of the same name held the trademark for the Corona name. The legal issue was not settled until 1985. In 1977 Modelo held only one percent of the market abroad for Mexican beers. Ironically, Corona’s sales in the United States did not grow until it readopted the traditional clear bottle, with its long neck and brand name in raised letters painted on the glass. Modelo also repositioned the beer in the U.S. marketplace by ending discounting, in order to upgrade its image, and it conceded to importers the right to make promotional objects such as t-shirts and key chains with the Corona label.

Barton Beers, Ltd., Modelo’s Chicago-based importer for the 24 states west of the Mississippi, was largely credited with spurring Corona’s growth in the United States by targeting students, some of whom had sampled the brew on spring break at the Mexican resorts of Cancún and Cabo San Lucas. Barton’s television commercials featured attractive young people chilling out with bottles of Corona on sun-drenched tropical beaches fringed with palm trees. Often served in bars and restaurants with a wedge of lime, Corona appealed to a yen for the exotic, while its light flavor—similar to U.S. beers—offered a comforting taste of familiarity. Meanwhile, Corona’s other U.S.-based importer, Gambrinus Co. of San Antonio, was targeting millions of Mexicans with Spanish-language commercials linking the beer to evocative sounds and images intended to inspire nostalgia for the mother country.

Corona’s U.S. sales rocketed from 1.8 million cases in 1984 to 13.5 million in 1986, passing Beck’s and Molson to rank behind only Heineken among imports. Sales soared again in 1987, to 22 million cases. Then Corona hit a snag, attributed to a bizarre rumor that the brew was contaminated by urine. In addition, Gambrinus reportedly created resentment in northeastern markets by signing agreements with disreputable distributors who jacked up prices and provided shoddy service. In 1992 Corona regained its Number Two ranking north of the border, with 15 million cases sold. Moreover, the beach-party advertising was working in other parts of the world, including Australia and New Zealand, where Corona was the top imported beer, and Japan, where it ranked second.

Results in Mexico itself were not as good, even though Corona was the top beer. Modelo’s sales in the home country dropped in 1982 and 1983 because of the nation’s economic crisis, and the 1981 level of consumption was not surpassed until 1987. When Valores Industriales, S.A. (Visa), the holding company for Cervecería Cuauhtemoc, acquired Moctezuma in bankruptcy court in 1985, Modelo lost its top ranking in sales. Nevertheless, the company continued to make money, and it plowed the profits back into new investment instead of borrowing from the banks. In 1984 it opened its own plant in the state of Tlaxcala for producing barley malt. A decade later, this complex included 63 grain silos and was turning out 100,000 tons of malt a year. In 1991 Modelo’s sales volume forged ahead of the beer division of Fomento Económico Mexicano (Femsa), Visa’s beverage subsidiary and now Mexico’s only other brewer.

Despite Modelo’s prosperity, its large labor force was receiving only an estimated eight percent of the company’s net value in 1990. Workers were averaging three to four times Mexico’s minimum wage, but the latter sum was extremely meager (about $3 a day in 1998). Modelo had a long history of labor unrest, with the manufacturing and services division having sustained seven strikes and seven illegal stoppages between 1944 and 1994, including a 48-day walkout at the Mexico City plant in 1987, following which almost one-third of the 5,000 workers immediately lost their jobs. In 1998 Grupo Modelo was employing nearly 42,000 people directly and 180,000 indirectly.

Cervecería Modelo changed its name to Grupo Modelo in 1991 and went public in 1994, offering 13 percent of its shares on Mexico City’s stock exchange. Because the company had virtually no debt and was earning large quantities of dollars and other hard currencies, its shares even rose during the severe recession that gripped Mexico following the sudden and devastating devaluation of the peso in December 1994. In 1998 the stock increased 24 percent in price even though all shares on Mexico City’s stock exchange fell an average of 24 percent during the year.

Fernández Rodriguez’s nephew Carlos Fernández González, a great-nephew of the founder, succeeded his uncle as director general of the firm in 1997, when he was only 31. He had started as a office boy at the age of 11. After receiving a degree in industrial engineering, he held posts in almost every area of the company. Fernández González initiated a program calling for company executives to meet with their staffs regularly, communicating Modelo’s market position, mission, and strategy for reaching planned objectives. Quality control was being based on Japanese and U.S. “just in time” methods).

In 1997 Grupo Modelo accounted for 55 percent of all beer sales in Mexico and produced 35 million hectoliters. Corona Extra itself held 32.5 percent of the national market. During the year Corona passed Heineken to become the leading imported beer in the United States. Grupo Modelo held 80 percent of the export market for Mexican beers and was distributing its brands in 143 countries. Besides Corona Extra, its brands were Corona Light, Modelo Especial (mainly sold in cans and the company’s second-leading brand), Light Modelo, Victoria, Negro Modelo, Pacífico, Estrella, Leon Negra, and Montejo.

Company Perspectives:

Grupo Modelo ’s mission is to produce, distribute and sell quality beer, at a competitive price, optimizing resources and surpassing customer expectation, in order to contribute to the social development of Mexico.

Grupo Modelo’s eighth plant, completed in Zacatecas in 1997, was scheduled to become the biggest in Latin America. The company (in 1996) had 644 distribution agencies and subagencies, all centrally administered except for 183 affiliates. Grupo Modelo was, in 1997, operating 33 companies, which owned approximately 1,394 facilities, including one factory each for producing metal cans, plastic caps, glass bottles, and cardboard boxes, and convenience stores under the names Modeloramas, Super Flash, Circle K, and Stores 12 + 12. Other subsidiaries were involved in the production of ice and machinery and the operation and maintenance of warehouses and distribution centers, real-estate properties, a shipping fleet, and even a soccer stadium in Torreón. Grupo Modelo also owned 9,910 vehicles. Net sales came to 15.52 billion pesos ($1.93 billion) and consolidated net profit to 2.36 billion pesos ($293.5 million) in 1997. The company’s debt was only 2.8 percent of net sales.

A Troubled Partnership in the 1990s

With the advent of the North American Free Trade Area and eventual elimination of trade barriers, including tariffs, Grupo Modelo decided to protect itself from an invasion of U.S. beers into the Mexican market by forming a partnership with Anheuser-Busch Cos. It sold a 17.7-percent stake in the company (and a similar share of its unlisted operating subsidiary, Diblo, S.A. de C.V.) in 1993 to Anheuser-Busch for $447 million. Modelo remained the exclusive distributor of Anheuser-Busch’s products in Mexico, a position it had secured in 1989. Four Modelo beers, including Corona, continued to be imported and distributed in the United States by Barton Beers and Gambrinus, rather than Anheuser-Busch. The two enterprises agreed not to open breweries or bottling plants in each other’s country. Anheuser-Busch received an option to raise its stake in Modelo and Diblo to 50 percent within four years.

Anheuser-Busch appeared to fare poorly under the partnership, because in the late 1990s Budweiser and Bud Light were selling well only in tourist areas of Mexico. Nevertheless, the U.S. company exercised its option by raising its equity holding in Grupo Modelo to 37 percent in 1995 and 50.2 percent in 1997, bringing its total investment to about $1.6 billion. The sale price was in dispute, however, since the pact called for it to be 19 times earnings. With Modelo’s stock trading at 38 times earnings in early 1998, its shareholders demanded more money, insisting that the valuation of Diblo’s earnings should include profits from nonconsolidated subsidiaries as well as companies in which Diblo held majority control. The matter was referred to international arbitration, which, in September 1998, ruled in favor of Anheuser-Busch.

Although Anheuser-Busch won this round, the company was angered by Grupo Modelo’s decision in 1996 to renew its alliances with importers Barton Beers and Gambrinus for another ten years. In 1998 Anheuser-Busch was marketing what a Wall Street Journal article called “Corona clones” in southern Florida and Virginia, with at least one of the three beers scheduled for national distribution. Wholesalers were said to suspect that the introduction of these beverages had resulted from the giant U.S. brewer’s failure to win distribution rights for Corona. Regardless of this troubled and rumor-laden partnership, Grupo Modelo remained the top Latin America beermaker, and its Corona Extra product remained a leading import in the United States. Its future as a partner of Anheuser-Busch was unsteady, but its reputation and popularity seemed assured.

Principal Subsidiaries

Cebadas y Maltas, S.A. de C.V.; Cervecería Modelo, S.A. de C.V.; Cervecería Modelo de Guadalajara, S.A. de C.V.; Cervecería Modelo de Noroeste; S.A. de C.V.; Cervecería Modelo de Torreón, S.A. de C.V.; Cervecería Modelo de Yucateca, S.A. de C.V.; Compañia Cervecería de Trópico, S.A. de C.V.; Compañia Cervecería de Zacatecas, S.A. de C.V.; Diblo, S.A. de C.V.