Henry Ford was reputed to have once remarked about his Model T, "You can have it in any color you want so long as it's black." That apocryphal story was supposedly one of the reasons rival carmakers who painted their autos in every shade under the rainbow were able to grow and take share.
And when it comes to brewing beer in Mexico, the situation isn't all that different. Drinkers can have any beer they want so long as it's made by Anheuser-Busch InBev (NYSE:BUD) or Heineken (NASDAQOTH:HEINY).
Last month the country's Federal Competition Commission essentially ruled the two brewers could continue dominating the market as they have, as it largely left the system of exclusivity in place.
With A-B's recently acquired Modelo brands owning an estimated 56% of the industry and Heineken's Cerveceria Cuauhtemoc Moctezuma holding another 43%, the decision gives little hope to Mexico's third largest brewer, SABMiller (NASDAQOTH:SBMRY), that it will ever be able to grow beyond its negligible 0.3% share.
At issue were the exclusivity deals the big brewers have in place with restaurants and convenience stores, where they provide financing, discounts, and even help with navigating bureaucratic red tape -- not to mention signage, refrigerators, and other branded materials -- in exchange for agreements to only sell their brands of beer.
Miller challenged these agreements before the commission in 2010, charging they stifled competition, and though the regulatory body ruled the deals could account for no more than 25% points of sale, and must be lowered to 20% over the next five years, the one commissioner who voted against the decision said it merely formalized the status quo, as the exclusivity deals currently are between 25% and 30% of the market.
Miller had sought to have arrangements banned completely, much as they are with the soft drinks market, but the commission said they could remain in place, though craft brewers could now enter into such agreements as well. Ironically, Miller will still be locked out of much of the market.
Coca-Cola (NYSE:KO) is the dominant soda brand south of the border, and it's been alleged that the company is able to maintain such leadership because it improperly enters into exclusivity deals with the mom-and-pop convenience stores in exchange for financing, equipment, and marketing materials, just as occurs with the brewers. More than a decade ago Coke was found guilty by the commission of violating the law, but in the world's biggest market for soft drinks, the beverage maker still owns 69% of it. Coca-Cola FEMSA (NYSE:KOF), Coke's bottling and distribution operations in Mexico and much of Latin America, generated more than $11 billion in revenues last year.
With restaurants and bars accounting for around 15% of beer sales in Mexico, and 95% of them only serving Modelo or Cerveceria Cuauhtemoc beers, don't expect Miller to drive any sales growth south of the border to put it back in the black.
Fool contributor Rich Duprey has no position in any stocks mentioned. The Motley Fool recommends Coca-Cola. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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