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Modelo needs to chart a course for the company's future. The longstanding objective is to move Modelo into the top five of brewers in the world. As of 2005, Modelo remained outside of the top six. The company has 52 of the domestic market and is the best-selling imported beer in the United States, 50% ahead of next-best seller Heineken. The most significant underlying problem with respect to global market position relates to the company's ownership structure, specifically whether it will come under the A-B banner eventually or participate in some other way in the ongoing industry consolidation.
In the domestic market, Modelo faces a secondary problem in that its leading competitor FEMSA is improving its market position by controlling distribution channels and by promoting high quality subsidiary brands. FEMSA has been gaining market share steadily in Mexico while Modelo has been losing share. The domestic market is a duopoly, and is challenging for a number of reasons including reduced trade barriers as a result of NAFTA, economic volatility and the increasing strength of FEMSA, which could support its beer ventures with profits from its Coca-Cola partnership. This problem is long-run in nature, and concerns the structure of the Mexican market and the shifting competitive dynamics within the duopoly.
Corona's strategy of producing in Mexico is also a threat to its export markets. Many of the company's costs are in pesos, and that currency is highly volatile. When the peso increases in value, this increases the cost of Corona is export markets. This represents a challenge for the company, especially in light of lessons learned in the U.S. where the company's distributors were forced to eat an increase in the excise in order to maintain sales. Corona's pricing power with consumers is not substantial enough to offset the currency exchange rate risk that Corona faces. This is also a long-run issue because of the long time frames and heavy investment required to make changes to the geography of production.
In the short-run, there are some financial problems that the company faces. Some of these may be related to the currency exchange rate risk that stems from producing in Mexico. The first is that operating income is not rising as fast as revenues. Increasing financial strength essentially requires that revenues grow more quickly than costs, but the top line grew 6.4% last year and operating income only grew 1.4%. Funds provided by operating activities declined 1.9%, again indicating that increases in revenue are not currently translating into increases in cash flow or operating profit. The company has few other major problems. It is liquid, has increased equity faster than assets, is improved its ROE and is seeing improvements in its stock price. This success can be continued if the handful of short- and long-term issues that the company faces are addressed.
Corona is the number five beer brand in the world, and the leading brand for Grupo Modelo. As of 2007, the company has the objective of moving into the top five of global brewing companies. The company is expanding its production in order to meet increasing international demand, primarily for Corona. The Corona brand rose to prominence in the United States, where Modelo used two distributors, each with roughly half the country. The distributors were responsible for everything except the brewing, and this led to healthy competition between the distributors that ultimately built the Corona market share rapidly across the country.
The global beer industry is a marketing-intensive industry that is heavily fragmented. For several years, however, there has been a trend towards consolidation that has resulted, for example, in the size of the world's largest brewer expanding from 121 million hl in 2000 to 233.5 million hl in 2005, despite sales in most countries being flat or slightly declining. The key growth markets for beer tended to be in Asia and South America, while the markets with the highest consumption per capita continued to be in European nations where consumption is declining. Consolidation therefore is being driven by the need to grow volumes and increase economies of scale in order to retain profitability, as well as by the desire to gain access to the strongest emerging markets.
Modelo has a number of strengths from which to derive value. These include the power of its Corona brand in international markets, a strong market position domestically, a healthy balance sheet, economies of scale from producing solely in Mexico, and strong distribution partners in the United States. Some of Modelo's weaknesses include its declining domestic market share and relative lack of strong domestic brands; its uncertain ownership situation; and the appeal of its products even to consumers who do not normally drink beer.
There are a number of opportunities for Modelo. These include consolidation, moving into new growth markets, shoring up the domestic and U.S. markets, and utilizing production outside of Mexico in order to reduce exchange rate risk. The external environment has a number of threats as well. These include excise duties and exchange rate risk, both of which threaten the company's pricing power; intense competition; declining beer consumption in most high-consumption markets; new competition in the domestic market as a result of NAFTA and increased competition from FEMSA.
In order to achieve the company's objective of global market share growth, Modelo needs to utilize its strengths to take advantage of growth opportunities. The most important strength is the Corona brand. There are considerable opportunities in a number of high-growth markets. These are often in nations where the "fun in the sun" sales shtick either does not have unique appeal (many Latin countries) or is relatively unknown (Russia, China). Corona has had success in these countries, however, so its marketing partners have been able to make the brand resonate despite the cultural differences from the American market.
Defending the domestic market share is also critical, because domestic volumes are important to Modelo's status as a volume leader. Competition is expected to come from American and Canadian brewers, as well as from FEMSA. The foreign competitors threaten the duopoly. There may be opportunities for Modelo, however, to partner with foreign companies in order to exploit their newfound access to the Mexican market, a result of Modelo's strong domestic distribution network. While NAFTA also increases Modelo's access to the other North American markets, it also increases competitor access to these markets. Given that Modelo's superior access to these markets and first mover advantage is a source of Modelo market share, NAFTA represents a lowering of barriers to entry for competitors, many of whom could imitate the Corona marketing message. For Modelo, NAFTA represents a double-sided strategic threat. Protecting its current market share matches well with its brand and partner strength.
The company's main weakness is the lack of market dynamism in Mexico, and this leaves it vulnerable to the competitive threat in the domestic market. In general, however, the threats in the environment do not specifically align with Modelo's internal weaknesses -- the company can fend these threats off. For example, the brand strength of Corona and its premium positioning in international markets can help fend off the threat of excise taxes. Exchange rate risk works both ways -- the company can benefit from favorable movements just as easily as it can suffer from adverse movements. Declining beer consumption in some markets can be offset by increases in other markets, particularly as Corona's brand is widely known and can be launched into new markets and make immediate market share gains.
Criteria of Evaluation
Modelo is facing a number of issues, and each issue should be resolved according to its own criteria of evaluation. As long as the different criteria are more or less congruent, that will be sufficient. The ownership/consolidation issue needs to be resolved. The major criteria will be the company's global market share objectives, the family's control objectives and lesser objectives relating to market share gains and market access -- however the situation is resolved it should help Corona's business prospects.
The domestic market share issue should be resolved according to the market share criteria. Modelo needs to defend its share of the Mexican market in whatever way possible. That FEMSA is gaining share at a rate equivalent to the market growth rate indicates that FEMSA is not stealing share from Modelo; despite FEMSA's strength, Modelo is losing to imports. Building defenses against these market share incursions should be the primary criterion, with maintaining profit levels a secondary criterion.
The third major issue is with respect to Corona's global growth strategy. Global Corona market share needs to be the main criteria for evaluation. The company's objectives are related to share, with profit secondary. The company should also objectives for individual target high-growth countries (China, Brazil, Thailand, Russia, etc.).
In the short-run, the company's first alternative is the status quo with respect to each of its problems. Modelo is generally a successful company based on its global market share, profitability, growth and balance sheet health. Its threats…[continue]
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