Cracking open new markets: New regulations are helping craft brewers find their stride

Mexico is the world’s leading beer exporter, producing 86m hectolitres (hl) per year, worth $20bn. The country has topped the list of beer exporters for the past six years, thanks to surging international demand for brands such as Corona Extra, Modelo, Sol and Tecate, with exports growing 9% to reach around $2.4bn in 2014, according to the National Statistics Institute. Tequila exports, meanwhile, were worth $1.17bn in 2014.

The market is dominated by two companies, Cuauhtemoc-Moctezuma and Modelo, both of which have undergone ownership changes in recent years. The former was acquired by the Heineken group for $7.34bn in 2010, while the latter was bought up in 2013 by the Anheuser-Busch InBev Group, which paid $20.1bn to purchase the remaining 50% of the shares that it did not already own. Indeed, the sector operated as a duopoly for decades, something that only changed in 2013 following a lawsuit filed by SABM iller and supported by Mexican brewers Minerva and Primus. The resolution, announced by the Federal Economic Competition Commission (COFECE), partially opened the market by decreeing that only 25% of beer distribution contracts could contain exclusivity clauses, a practice that had been widely used by the two primary players.

“The lawsuit had a positive impact for craft brewers,” Rodolfo Andreu Valdés, one of the founding partners at craft brewery Primus, told OBG. “The only official document in the country that gives a legal presence to microbrewers is the COFECE resolution. This document states that a craft brewer is one that produces less than 100,000 hl per year.” Andreu added that the stated amount is a significant number considering that at current production rates, all microbrewers combined barely reach the 100,000-hl mark. Nonetheless, Al Jazeera reports that the Mexican craft beer market is growing rapidly, at a rate of 50-60% a year.

Challenges

One of the most important challenges to the craft industry is access to raw materials. A very large percentage of the barley produced in Mexico is absorbed by the two main producers, leaving little behind for microbrewers. “There have been some attempts at having malted barley produced in Mexico,” Andreu told OBG. “Nonetheless we have found that the lack of knowledge, experience and technology makes quality inconsistent, and we have chosen not to use local suppliers.” Additionally, Mexico does not produce hops. As a result, most of the country’s craft beer makers have to import all raw materials.

A second challenge is the taxation regime. The Special Tax for Products and Services (IEPS) is a tariff charged to particular products such as alcohol and tobacco. IEPS is calculated on a cost percentage, where beverages under 14% alcohol by volume pay 26.5% IEPS plus 16% value-added tax (IVA). Microbrewers, with considerably smaller production volumes and imported raw materials, have higher costs than large producers. With production costs three times higher than for mega-brewers, craft producers are also paying more IEPS and higher IVA. Since December 2014, craft brewers, through their Mexican Brewers Association (ACERMEX), have been lobbying for this percentage-based cost to be converted to a fixed per-litre cost, proposing to fix it at MXN3.50 ($0.24) per litre from the current estimated MXN10 ($0.67) per litre, and adjust annually for inflation.

Fast Pace

Andreu said that a distinction has to be made between licensed companies and unregulated homebrewers. “I estimate that there are more than 100 legally established companies, while there are more than 600 home brewers,” he said. Mexico City-based Primus has a production capacity of 600,000 litres per year in its San Juan del Río facility as of 2015. Production for Jalisco-based Minerva reached 1.1m litres in 2013, and its goal for 2014 was 1.5m.

With a growing consumer base and widening offer, the Mexican microbrewery sector is moving at a fast pace. Microbrewers’ goals for 2016, as reported by ACERMEX, include having 1% market share of the Mexican beer market and employing approximately 16,000 people. If challenges such as distribution, supply chain integration and taxation continue to be addressed, the sector is bound to continue with double-digit growth in the upcoming years.

Expansion Drive

Taking advantage of strong demand from overseas, the key players are all looking to expand their operations. In March 2015 Heineken unveiled plans to construct a MXN7.5bn ($504.8m) brewery in the northern state of Chihuahua. The facility will have an annual capacity of 5m hl of beer per year once operational, with completion targeted for 2017. Meanwhile, Grupo Modelo is looking to resurrect beer production in Yucatan state, 13 years after the region’s brewery, Cervezeria Yucateca, closed its doors. The world’s largest brewer, AB InBev, is set to invest $146m in a new facility in the state, which will increase production capacity by over 8%, as well as build a $182m aluminium can factory. Construction of the two plants − to be built next to each other − will begin in the second half of 2015 and they are scheduled to open in the first half of 2017, according to Grupo Modelo’s CEO, Ricardo Tadeu. Exports will be shipped through the port of Progreso to meet European demand for Grupo Modelo brands, such as Corona, Pacifico and Negro Modelo, the conglomerate said.

The third and largest investment in the beer segment announced so far in 2015 comes from Constellation Brands, which announced plans in June 2015 to invest more than $2bn in its bottling and brewery plant in Nava, located in the northern border state of Coahuila.

Due to anti-trust terms, AB InBev was required to sell off Grupo Modelo’s Coahuila plant, alongside the trademarks for Grupo Modelo beers in the US, which were purchased by Constellation Brands, headquartered in New York. The company said that it would invest some $1bn at the plant to boost capacity from 10m to 25m hectolitres per year.

Opportunities In The US

The massive investment from Constellation Brands, which will make the Coahuila site one of the largest breweries in the Americas, reflects the scale of the opportunities in the US market.

Figures show that the US absorbed a total of 78% of Mexican beer exports in 2014. “Imported beer and craft beer is growing a lot in the US,” Constellation Brands’ vice-president of external relations, Edgar Guillaumin, said. “We want to promote Mexican premium brands in the US market, so we will concentrate on beer, where we have aggressive growth plans.” The company plans to increase its share of the US beer market from 7% to 14%, according to Guillaumin.

While the export segment is going from strength to strength, the domestic beer market has been less dynamic. For a number of years, annual consumption per capita has remained steady, at approximately 60 litres, well behind the Czech Republic’s 148 litres – ranked number one in the world − and trailing the comparable Brazilian market, where average consumption per year is 68 litres, according to a 2012 report on global beer consumption from Japanese producer Kirin.