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Colombia Food and Drink Report Q2 2010
Business Monitor International, Feb 2010, Pages: 73
Colombia Food and Drink Report provides industry professionals and strategists, corporate analysts, food and drink associations, government departments and regulatory bodies with independent forecasts and competitive intelligence on Colombia's food and drink industry.
Over the last 18 months the Colombian beer sector has been hard hit by the economic downturn. This will be aggravated by the recent news that on February 1 value-added tax (VAT) on beer is set to rise from 3% to 14%, a move that will increase average beer prices by at least 8%. Brewing giant SABMiller has immediately warned that a planned tax rise on beer in Colombia could have a significant impact on its volumes in the country. Colombia is SABMiller's second most important market in terms of earnings and the planned tax hike partly explains why its share price has underperformed the FTSE 100 index over the last month.
SABMiller entered Colombia in 2005 when it acquired the local Bavaria brewing firm, which had a virtual monopoly in four Latin American markets – Colombia, Peru, Ecuador and Panama. This market dominance made Latin America one of SABMiller's most profitable locations, with profit margins up to 50% higher than in other regions because of the brewer's ability to influence retail prices.
SABMiller has also brought its wealth of marketing expertise to the sector. When it entered Colombia per capita consumption of beer was low and stagnant. Beer drinking was frowned upon by wealthier consumers and many of Bavaria's brands were often regarded as the same product packaged differently. SABMiller launched a successful marketing blitz which included differentiating Bavaria's portfolio of brands. This successfully boosted consumption in the four years following the company's market entry. In SABMiller's last fiscal year, ending March, the company's volumes fell by 6% and this pattern continued in the first half of the following fiscal year, with volumes down by 2% in the six months to September. In the most recent quarter for which results are available there had been signs of improvement, with SABMiller's volumes advancing by 6% in the three months to December. However, the hefty tax rise looks likely to nip this recovery in the bud and SABMiller has warned that the rise could lead to a one-off fall in its volumes of up to 4.5%. The firm also cut its medium-term volume growth target for Latin America as a whole to 4-6% a year from 5-7%.
Such difficulties in one of its core markets have renewed questions over the firm's failure to land the brewing assets of Mexico-based Femsa, which were recently purchased by Heineken. SABMiller was believed to be in the best position to land the business because of its greater size and stronger balance sheet, but ultimately failed to match Heineken's bid. While SABMiller is the second largest brewer in Latin America its operations are concentrated in Colombia because of the relatively small size of the other countries it operates in. Even Colombia offers up a population of only 44mn compare to the 106mn consumers available in Mexico. The acquisition of Femsa Cerveza would therefore have resulted in a more well-rounded business and SABMiller's failure to land the business is likely to be another reason for the recent underperformance of its share price.
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