Corona

Corona Beer: From a Local Mexican Player to a Global Brand Case Analysis

Chris Brown, Jennifer Roath, Janissa Pheann BUSA 499 November 30, 2009

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Table of Contents:

Business Overview............................................................................................................p.3 Products.................................................................................................................p. 3 Structure................................................................................................................p.3 Leadership.............................................................................................................p.3 Historic Strategies.................................................................................................p.3 Strategic Issues......................................................................................................p.3 PESTEL Analysis.............................................................................................................p.4 Political.................................................................................................................p.4 Economic..............................................................................................................p.4 Social.....................................................................................................................p.5 Technological........................................................................................................p.5 Environmental.......................................................................................................p.5 Legal.....................................................................................................................p.5 Industry Analysis..............................................................................................................p.5 Threat of Substitutes.............................................................................................p.5 Threat of New Entrants.........................................................................................p.5 Bargaining Powers of Buyers...............................................................................p.6 Bargaining Powers of Suppliers............................................................................p.6 Intra-Industry Competition...................................................................................p.6 Competitor Analysis.........................................................................................................p.6 Value Chain Analysis.......................................................................................................p.7 Primary Activities.................................................................................................p.8 Inbound Logistics......................................................................................p.8 Operations.................................................................................................p.8 Outbound Logistics...................................................................................p.8 Sales and Marketing..................................................................................p.9 After-Sales Service...................................................................................p.9 Secondary Activities.............................................................................................p.9 Research and Technology.......................................................................p.10 Human Resource Management...............................................................p.10 Firm Infrastructure..................................................................................p.10 Resource-Based View.....................................................................................................p.10 Financial Analysis...........................................................................................................p.11 SWOT Analysis.............................................................................................................p.13 Strengths.............................................................................................................p.13 Weaknesses.........................................................................................................p.13 Opportunities......................................................................................................p.13 Threats................................................................................................................p.14 Recommendations...........................................................................................................p.14 References.......................................................................................................................p.16 Exhibit 1: Key Financial Information.............................................................................p.17

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Exhibit 2: Grupo Modelo Financial Ratios.....................................................................p.18

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BUSINESS OVERVIEW Grupo Modelo is the number one beer producer in Mexico and the producer of Corona, one of the leading import beer brands sold in the United States. Since its formation in 1922, the company has been family-operated and focused on becoming a leader in the Mexican beer production and distribution markets. More recently, they have evolved this strategy to include export markets such as the United States and Canada. Products: Grupo Modelo has an extensive line of products including Corona Extra, Corona Light, Modelo Especial, Pacifico Clara, and Negra Modelo beers. In 2005, three Grupo Modelo brands were in the list of the top eight brands in the United States. The company also owns sports teams, which is a non-core business. Structure: Grupo Modelo is structured like a holding compan y mainly consisting of a 77% majority share in a sub-holding company called Diblo, S.A. de C.V. Diblo has a controlling interest in a number of companies that largely concentrate on the production, sale, export, and import of beer. Modelo is also one of the beer producers within this group (Grupo Modelo 2007). Leadership: Grupo Modelo has been family-operated since its creation in 1922. There is a president and chief executive officer, currently Carlos Fernandez, subordinated by vice presidents of finance and tax matters, human resources, operations, corporate planning, legal matters, international affairs, supplies, corporate relations and communication, and administration and finance. There is also a general director of domestic sales and a marketing director (Grupo Modelo 2007). This list of corporate officers suggests that Grupo Modelo is set up as a functional structure. Historic Strategies: Grupo Modelo was formed on March 8, 1922 and officially opened its first brewery three years later. In 1936, the Fernandez family became the sole  proprietor and has maintained ownership of Grupo Modelo ever since. Grupo Modelo first introduced Corona in 1979 and by 1988 it had become the second most popular  imported beer in the United States. Antonino Fernandez, former CEO of Grupo Modelo, listed Corona on the Mexican Stock exchange in 1994. Upon its entrance to the market, Anheuser-Busch purchased 50.2 percent of Grupo Modelo’s shares. Although it had over  half of the outstanding shares, Anheuser-Busch held only 43.9 percent of the voting rights so ownership by the Diez family was maintained. In 1 997, Corona achieved its goal and surpassed Heineken as America’s top imported beer. In that same year, Carlos Fernandez was appointed as the CEO of Grupo Modelo. Since 1997, Corona has been the  best-selling import beer in the United States and in 2004, it outsold the former number  one by a 50 percent margin. Strategic Issues: Throughout the remainder of this case analysis, we will analyze Grupo Modelo’s current strategy and its position within the competitive beer industry. The key question this case analysis addresses is whether Grupo Modelo will be able to maintain its status as one of the market leaders in beer production and distribution even as competition in the industry increases. Although the case largely concentrates on the export strategy to the U.S., we have also incorporated information pertaining to Mexico’s

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domestic market in order to understand the specific opportunities and threats that stem from the home market. We will conclude by offering recommendations for continued success in the global beer market. PESTEL ANALYSIS In order to determine our recommended future strategies for Grupo Modelo, we must first look carefully at individual variables that could affect the company. The political, economic, social, technological, environmental, and legal categories all represent external variables that could influence Grupo Modelo’s operations. These factors could have  positive, negative, or neutral effects on the profitability and success of the Grupo Modelo Company. Political: Grupo Modelo is headquartered in Mexico and conducts all of its production activities in several plants located throughout the country. Since Mexico has an unstable  political environment this may present challenges for the company. There is corruption in the Mexican Government, which can lead to civil unrest in the country. This issue also affects Mexico’s relationships with other countries, and therefore may affect import  policies.

Mexico also faces challenges from drug cartels. Drug cartels in Mexico represent a threat to the safety and stability of the country. As cartel members fight the police and threaten citizens, the country has become very dangerous in some regions. Grupo Modelo has seven production plants throughout Mexico. One of their plants is located in Sinaloa, a state known for a heavy presence of drug cartel violence. There is possibility for a disruption of operations to occur, as well as safety concerns for employees, and distribution disruptions. Grupo Modelo can also be heavily affected by new taxes and tariffs placed on its goods. If countries increase their import tariffs, it could damage the profitability of the company. In the past, Grupo Modelo has decided to absorb tax increases rather than raise prices for  consumers. If the company was forced to increase prices to cover increased taxes or  tariffs, it might hurt their market share and decrease the brands’ attractiveness to consumers. Since imported beer is already priced higher than domestic beer, this potential  pricing change may be a threat for the company. Economic: Economic conditions can have interesting effects on the beer industry. In  positive economic cycles, beer companies are able to do quite well. In times of recession, however, beer companies can also perform well. One challenge for Grupo Modelo is the volatility of the Mexican economy and its effect on currency exchange rates. Exchange rates can dramatically affect the success of their export activities. As the value of the Peso falls, it becomes increasingly more expensive to export to other countries. Social: Societal changes can affect consumer activity, and must be considered when making operational decisions. For example, women make up a significantly smaller  consumer base for beer companies. Companies have invented new types of beverages such as lighter beers, and flavored alcoholic beverages to attract more women to their 

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 products. There have also been trends toward healthier lifestyles, and more consumers want lighter, lower -calorie beers. This means that for Grupo Modelo, it is essential for  new research and development to be occurring in order to maintain a product line that consumers desire. Another societal change that is occurring is increased Mexican immigration to the United States. This means that Grupo Modelo has a potentially increased customer base in the United States to which they can appeal. Technological: Changes in technology enable companies to develop better brewing  processes, more efficient distribution channels, and facility upgrades that increase  production, increase consistency, and reduce costs. Grupo Modelo will need to stay current on brewing technology in order to compete in this market.

Technology has also created new advertising media. In order for companies to stay competitive, they must keep up with technological innovations. If competitors capitalize on technology and are able to streamline their value chain, Grupo Modelo could be at a disadvantage. Environmental: With society becoming more environmentally conscious, a company’s approach to social responsibility can hurt or help their brand image. If a company acts irresponsibly, sales can suffer. Grupo Modelo has begun several CSR initiatives including voluntary reporting of carbon emissions, and this can have positive future effects for the company and its brand image. Legal: Due to the increased media outlets available, beer companies need to be careful about where and how they advertise. There are laws controlling advertising content and location of that companies must be aware of. In addition to laws in Mexico, Grupo Modelo must follow the laws of the countries to which it exports.

INDUSTRY ANALYSIS Grupo Modelo is a top brand in the global beer industry. The company is currently the fifth largest producer of beer by volume. In order to determine future strategies for the company, we must first consider the attractiveness of the beer industry. The ability of  Grupo Modelo to compete successfully is determined by the strength of the external environment against them. Threat of Substitutes: For Grupo Modelo and the beer industry, the threat of substitutes is high because consumers have many choices of substitute beverages. Beer substitutes include liquor, flavored alcoholic drinks, non-alcoholic beer, and beverages in general. In Mexico, there is also a large tequila drinking population that might be suspected of  decreasing the market for beer, but this has not appeared to decrease beer consumption. Threat of New Entrants: For large beer companies, the threat of new entrants is low. Although there are hundreds of small microbreweries throughout the United States, it is difficult for microbreweries to compete with large beer companies. Large beer companies

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have the advantage of economies of scale. Forward integration in the value chain allows large companies to have cost advantages over smaller companies. The beer industry also requires heavy startup capital. This makes the industry unattractive for new entrants. Bargaining Power of Buyers: The bargaining power of buyers is a moderate threat for  the beer industry. Companies must be aware of taste preferences and what people want or  they will have few customers. There is also price sensitivity in the beer market. Companies are subject to the market demand price, and therefore more restricted as to what they can charge. Buyers also have some power due to the fact that there are low switching costs for them. Companies must keep their customers satisfied with the product they receive, otherwise they will buy other brands. Bargaining Power of Suppliers: For Grupo Modelo, the power of suppliers is low. Grupo Modelo is a large company and possesses half of the Mexican market share of the  beer industry. Grupo Modelo uses commodity products such as barley, hops, yeast, and adjuncts. Commodity products are easily replaceable, and that means that suppliers have little power. Due to the size of Grupo Modelo, suppliers would certainly not want to lose  business with them. In addition, Grupo Modelo has vertically integrated its supply chain and therefore has control over many of its product inputs. Intra-Industry Competition: There are intense competitive forces within the be er  industry. This fierce competition represents the greatest threat for Grupo Modelo. There is high differentiation in products and advertising. Within the b eer industry there is competition from both domestic products and import products, so companies have many types of competitors to be aware of . There is also a great threat coming from the  possibility of mergers and acquisitions in the industry. As large companies acquire others, they can become dominant industry players as they gain cost and brand be nefits from economies of scale and market share.

Overall, the beer industry is very attractive for Grupo Modelo to compete in. They face low pressure from suppliers, a low threat of new entrants and moderate buyer pressure. The industry is highly competitive with many substitutes available, so it is essential that Grupo Modelo develop a strategy that will help them do well against both pressures. COMPETITOR ANALYSIS FEMSA: FEMSA is the main competitor to Grupo Modelo in Mexico. The two companies dominate the Mexican market. FEMSA has been able to be successful in recent years due to new strategies. FEMSA has invested in quality beer production, and is recognized for having the “top seven best-tasting beers in Mexico”(Som, C-254). FEMSA also decided to take ownership in its own complete distribution channel OXXO. This is a very large chain of convenience stores in Central and North America. Another  strategy of FEMSA was to partner with Coca-Cola Company. FEMSA is now the sole distributor of Coca-Cola products in Mexico and Central America. FEMSA now has a sustainable competitive advantage against Grupo Modelo because the Coca-Cola brand is so strong. FEMSA has followed Grupo Modelo’s lead into the United States market and

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now has a marketing partnership with Heineken to grow their market share in the United States. Anheuser-Busch: Anheuser-Busch is a dominant market leader in the United States. They have 45 percent of the United States market share, and 75 percent of the beer  industry’s profits. Anheuser-Busch has been able to take adv antage of economies of scale and control their costs. Anheuser-Busch has also p urchased over 50 percent of the shares outstanding in Grupo Modelo, but hold minority voting rights. Anheuser-Busch produces its beers in foreign markets, because it is cost effective for them to do so. They are also industry leaders in the amount spent on marketing campaigns. Anheuser-Busch has  partnered with Grupo Modelo to distribute its products in Mex ico. Heineken: Heineken is the main import competitor against Grupo Modelo. They produce all of their products domestically in Holland. Heineken markets its beer as a premium import with superior taste. The “premium” image for the brand has increased their  success in the United States. Although they are second in import market share to Grupo Modelo, Heineken’s strategy is to become number one again through new aggressive marketing campaigns. Their advertising budget is three times larger than Grupo Modelo’s in the United States. Heineken also owns and operates distribution companies. Other Competitors: SAB Miller and InBev are other large players in the global beer  market. SAB Miller currently has 23% of the U.S. market and InBev is world’s largest  brewing company in terms of volume. There is potential for a merger between InBev and Anheuser-Busch which would create a super-company with 1/5 of the total world market share that may pose a threat to smaller beer companies including Grupo Modelo. In addition, there are many smaller microbrewers in the beer industry that produce differentiated and regional beers.

VALUE CHAIN ANALYSIS

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Primary Activities: Among the primary activities of the value chain, Grupo Modelo’s most important activities include the operations that go into producing the beer, outbound logistics of distributing its beers through contracted distributors in the U.S., and sales and marketing of the beers. The following sections will discuss each of the primary activities in more detail.

 Inbound logistics: To produce beer, Grupo Modelo must first collect the raw ingredients. The raw ingredients needed to make beer include malt from barley, potable water with certain mineral make-up, hops, yeast and adjuncts of corn, flour, or rice to complement the malt. These ingredients are commodity-like in nature and their prices can fluctuate drastically. Grupo Modelo constructed a malt plant in Idaho Falls, Idaho, that ships malt  by rail to the Mexican production facilities (Grupo Modelo 2007). Though combined differently, all of these inputs are used for each of the brands of beer   produced by Grupo Modelo. For this reason, there is strategic fit between each of the  brands in sourcing and bringing in the raw ingredients and items for packaging. Operations: The main operation that Grupo Modelo participates in is the production of   beer. Barley is collected and put through the malting process in which the barley passes through grinding which includes sprouting, germination, and drying stages. The endresult of this process is malt, which can further be toasted to determine the color and taste of the beer. Corn, flour, or rice can also be added to “complement the brightness and colloidal stability” of the beer (Grupo Modelo 2009). Finally, the extract from the female hop flower contributes to the flavor and aroma of the beer. During the fermentation  process, yeast is used to transform the sugar into alcohol, carbon dioxide, and other  secondary products that create each unique beer. Grupo Modelo has seven breweries throughout Mexico in Sonora, Cahuila, Sinaloa, Zacatecas, Guadalajara, el Distrito Federal, and Oaxaca at which this process is carried out. Many of its competitors brew their beers in the regional markets rather than centralizing production in the home market. Beginning in 2007, Grupo Modelo developed a strategic alliance with Nestlé Waters to  produce and distribute Santa María, Nestlé Pureza Vital, and other Nestlé water brands in Mexico (Grupo Modelo 2007). Outbound logistics: Within Mexico, Grupo Modelo controls the distribution of its beers with a strong distribution network. The company owns distribution centers throughout Mexico. Its beers are distributed to all states in Mexico through a network of agencies and sub-agencies within the Grupo Modelo subsidiaries. At the end of 2006, the distribution network consisted of almost 9,500 fleet vehicles (Grupo Modelo 2007). Grupo Modelo also has the exclusive rights in Mexico to import and distribute AnheuserBusch beer brands. It also imports Tsingtao and Carlsberg beer brands and produces and distributes Nestlé brands (Grupo Modelo 2007).

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The distribution of all of Grupo Modelo’s brands and the brands of Anheuser-Busch distributed by Grupo Modelo can be carried out through the use of the distribution centers, fleet vehicles, and agencies. This is another strategic fit that exists in Grupo Modelo’s value chain. In the United States and in other export countries, the contracted distributors are responsible for all activities that support the sales of the beer including transportation, insurance, and customs-clearance. In the United States these distributors include Barton Beers Ltd. and Gambrinus Inc. who were each responsible for all of the distribution activities in their own 25 states. Sales and Marketing: In Mexico, Grupo Modelo began developing point-of-sales convenience store locations in 1997 under the names Modelorama, Extra, and Extra Express similar to FEMSA’s OXXO convenience stores (Grupo Modelo 2007). These locations serve as the main contact point between Grupo Modelo and its customers in Mexico. Grupo Modelo has also recently increased its market research efforts and market segmentation in Mexico. In addition, Grupo Modelo brands are supported by and sold at sporting events of the sports teams that Grupo Modelo owns (Grupo Modelo 2009). These sports teams provide for a strategic fit in that they serve as outlets and promotional events for Grupo Modelo’s beers. In the U.S. Barton Beers and Gambrinus, the distributors mentioned above, are responsible for developing a pricing strategy and developing the marketing campaigns for  Grupo Modelo’s beers in their subsequent regions. These distributors are charged with  being experts in their markets. Grupo Modelo also has set up a subsidiary in the U.S. called Procermex Inc. that is responsible for coordinating, supporting and supervising Barton Beers’ and Gambrinus’ activities. Although these distributors have a large degree of autonomy, Grupo Modelo has always maintained control through this subsidiary of final decision regarding its  beers’ brand and image. According to data in the Corona case study, Heineken and Anheuser-Busch spend significantly more money than Grupo Modelo on advertising their products.  After-Sales Service: In the beer market, there is not a very high degree of after-sales service needed. After the beverage is selected and consumed, there is generally no need to contact the company. Unlike technical and high-cost items, there is very little need for  technical support or continued care for the product. Grupo Modelo has initiated a refund policy for its beers that allows customers to return the product for a refund if they are not satisfied. Secondary Activities: Secondary and support activities include procurement, technology and development, human resource management, and firm infrastructure. Of note in Grupo

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Modelo’s structure are the importance of procurement and of the advancement of  technology and development.  Procurement : Grupo Modelo has developed subsidiaries and partnerships for many of the inputs required to produce beer including malt companies, screw cap manufacturers, can manufacturers, freight companies, glass bottlers, cardboard manufacturers, and machinery manufacturers. This vertical integration is an important element of Grupo Modelo’s value chain because it allows the company to control the quality of its raw materials and machinery (Grupo Modelo 2007). In addition, in the early 2000s the company was working to develop e-procurement technology that would make the  procurement process more efficient by recognizing and filling demand for raw materials as needed (Grupo Modelo 2007). These ingredients and materials are able to be used for all of the Grupo Modelo beer   brands. This procurement system creates a value cha in strategic fit across all of the  brands.  Research and Technology: The most important and fundamental technology in Grupo Modelo’s business is the modernization and updating of the machinery involved in the  production of its beers. According to past annual reports, the company regularly updates this equipment. In addition, the company began developing e-procurement and demand and production management systems in the early 2000s.  Human Resource Management : One of the apsects listed in Grupo Modelo's strategic initiatives is the use of training programs to further develop the company’s employees. Grupo Modelo employed almost 37,000 employees at the end of 2006, of  which 52.3% were non-union workers (Grupo Modelo 2007). The case does not allude to HR management tactics or the role of people in Grupo Modelo strategy.  Firm Infrastructure: There is no significant mention in the case of financial mangement, legal counsel, accounting practices, or any other infrastructure elements that are important to the strategy and management of Grupo Modelo. As outlined earlier in this analysis, there are vice presidents of finance and tax matters, corporate planning, legal matters, international affairs, corporate relations and communication, and administration and finance. This indicates that these are important elements of the firm infrastructure. RESOURCE-BASED VIEW Grupo Modelo's tangible assets and competencies include its modern brewing facilities in Mexico, its beer recipes, and its Mexican distribution network. Since each of these is central to beer production and to the sales of that beer, we believe that these are core competencies. However, these are not competitive advantages. The brewing facilities of  competitors are also modern and continue to be upgraded. The main competitor in Mexico, FEMSA, also has a strong network of distributors and its own convenience stores.

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Though Grupo Modelo'a beer recipes may have distinct tastes, quality of taste depends on the subjective opinions of consumers. Corona has a competitive advantage through the fact that it is lauded for its unobtrusive and bland taste that attracts the non-beer-drinking  population. However, this does not constitute a sustainable competitive advantage  because other brewers could potentially develop a similar beer that appeals to the same crowd. The Corona flavor is imitable. In addition, the existence of “malternatives” and flavored alcoholic beverages provide a substitute, which makes it difficult for any  product to have a rarity advantage in taste. Grupo Modelo's intangible assets include partnerships with export distributors and the rights to distribute other brands in Mexico, the b rand image of its beers, a strong balance sheet and income statement, and a large market share in Mexico and the U.S. – two of the largest beer markets in the world. Of these, we believe that the large market share, brand image of Corona in the U.S. and the distributor relationship from which this brand originates are core competencies. As mentioned previously, the beer production and distribution market benefits from economies of scale, so larger market share and production benefit the company. This high market share also increases visibility of the brand. Despite the value created by a large market share, there are many other large brewers, which proves that this is not a rare or  non-imitable competency. In addition, because the level of competitive rivalry in the beer  market is so high, it is unlikely that this is a sustainable competency because Grupo Modelo is not organized very differently from the organizational models of its competitors. Regarding the core competencies of Grupo Modelo's brands and distributor relationships, especially with regards to Corona in the U.S. market, there is no competitive advantage  because these assets are not rare and are imitable. There are many brands in the beer  market, and although Corona stands out as the relaxing, “fun in the sun” beer, this image would not be difficult to imitate. The relationship that Grupo Modelo has developed with its two distributors in the U.S. is also disregarded as a competitive ad vantage because it is imitable and not rare. There are many such relationships that have developed in the industry, and while others may have not been as strong, it is possible to build such a relationship. FINANCIAL ANALYSIS Grupo Modelo's financial situation is very different than its competitors. Grupo Modelo and its competitors are quite different from the beverage industry and brewing sector averages given by Yahoo! Finance (2009). In general, Grupo Modelo has a stronger balance sheet and income statement than its competitors, industry, and sector. Refer to Exhibit 1 for Grupo Modelo’s key balance sheet and income statement information. Refer to Exhibit 2 for Grupo Modelo’s financial ratios over the last three years. Profitability ratios indicate how a business’s expenses and other costs compare to its earnings. It is noteworthy that the three measures of profit margin h ave stayed steady

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over time. Grupo Modelo has been able to grow its revenues by 27.8% over the threeyear period from 2006 to 2008 and still maintain its cost and expense levels. Over the last three years, Grupo Modelo has only seen significant growth in its return on stockholder  equity growing from 14.8% in 2006 to 18.4% in 2008. This indicates that Grupo Modelo has been able to provide better return to its stockholders even in light of the recent downturn in the market. As compared to its competitors, Grupo Modelo's profitability ratios show similar or better profitability. Especially noteworthy is Grupo Modelo's operating profit margin, which is 46% higher than the competitor average operating profit margin and 65% higher than the industry average operating profit margin. This difference may exist due to the company’s low operating expenses and low interest expenses. Grupo Modelo

2008 Financial Ratios AnheuserHeineken Busch

FEMSA

Sab Miller 

Competitor  Average

I ndustry

Se ctor  

Profitability Ratios:

Gross Profit Margin Operating Profit Margin Net Profit Margin Return on Total Assets Return on SE EPS

$

53% 73% 20% 15% 18% 4.58 $

46% 13% 8% 10% 20% 0.75 $

56% 22% 13% 4% 13% 2.97 $

65% 8% 2% 4% 8% 0.71 $

52% 16% 12% 10% 14% 1.43 $

54% 27% 11% 8% 15% 2.09

23% 8% 5% 4% 7% -

13% 4% 3% 3% 7% -

Source: Reuters (2009)

Grupo Modelo is also strongly positioned versus their competitors in regards to liquidity. Over the last three years, however, Grupo Modelo's liquidity has been decreasing as demonstrated by decreasing current and quick ratios. Even with this downward trend, Grupo Modelo remains much more liquid than any of its major competitors and compared to the industry and sector as a whole. None of Grupo Modelo's competitors are able to cover their current liabilities whereas Grupo Modelo can do so almost three times over. Grupo Modelo

2008 Financial Ratios AnheuserHeineken Busch

FEMSA

Sab Miller 

Competitor  Average

I ndustry

Sector  

Liquidity Ratios:

Current Ratio Quick Ratio Working Capital

4.07 2.66 29,181

0.89 0.59 (4,735)

0.47 0.35 (13,276)

0.94 0.69 (309)

0.65 0.42 (1,870)

1.40 0.94 1,798

1.15 0.80 -

1.47 1.09 -

Source: Reuters (2009)

Grupo Modelo has very little financial leverage compared to the industry and its competitors. The difference between the debt-to-equity ratio and the long-term debt-toequity ratio shows that much of Grupo Modelo's liabilities are short-term in nature. It is good that the company does not have large amounts of outstanding long-term debt for  which they will need to pay interest into the future, but it can also be dangerous to have so many short-term liabilities that they are unable to pay and must take on long-term debt to do so. In addition, considering the fact that the company has so little long-term debt, they may not be receiving the tax advantages associated with the tax deduction of interest expenses. The company increased its long-term debt in 2007, but did not increase its long-term debt after 2007.

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Grupo Modelo

2008 Financial Ratios AnheuserHeineken Busch

FEMSA

Sab Miller 

Competitor  Average

I ndustry

Sector  

Leverage Ratios:

Debt-to-Assets Lont-Term Debt-to-Capital Debt-to-Equity Long-Term Debt-to-Equity Times-Interest-Earned

24% 2% 31% 2% 24.69

63% 32% 169% 47% 4.41

80% 52% 404% 109% 3.98

78% 67% 360% 201% 2.52

51% 33% 106% 49% 3.21

59% 37% 214% 82% 7.76 -

6516% 4403%

4983% 3274% 1.15

Source: Reuters (2009)

We are somewhat concerned by Grupo Modelo's activity ratios. They appear to have low inventory turnover and a lot of inventory in storage. This may signal that they need to  better manage their production distribution systems and may benefit from a just-in-timelike system. The measures of activity, including days of inventory, inventory turnover, and average collection period have worsened over time. The time it takes Grupo Modelo to collect its receivables appears to be fairly standard to its competitors. Grupo Modelo

2008 Financial Ratios AnheuserHeineken Busch

FEMSA

Sab Miller 

Competitor  Average

I ndustry

Se ctor  

Activity Ratios:

Days of Inventory Inventory turnover Average Collection Period

137.08 2.66 45.29

52.75 6.92 23.37

103.47 3.53 45.24

90.67 4.03 48.18

50.20 7.27 30.76

86.83 4.88 38.57

1.35 5.09

0.020 140.09 40% 27,044.20

7.40 -

2.52 82.10

Other Important Ratios:

Dividen Yield P/E Dividend Payout Internal Cash Flow

$

0.048 $ 0.002 $ 9.56 63.68 46% 15% $ 44,238.00 $ 66,920.40 $

$ 0.029 $ 0.001 $ 0.00 30.16 597.07 13% 88% 41% 14,373.60 $ 6,499.00 $3,190.00 $

134.40 -

Source: Reuters (2009)

SWOT ANALYSIS Strengths: Grupo Modelo maintains outstanding relationships with its distributors in the United States. This allows them to give their distributors more responsibility in branding and marketing the product. In addition, Grupo Modelo is very strong financially, which is a great advantage to funding future projects and continuing operations. They have also developed a popular brand image and marketing campaign for their products. Grupo Modelo has a strong portfolio of top performing beers, as well as a popular taste in its Corona products. Through vertical integration of the supply chain, Grupo Modelo has  been able control costs and better manage quality control. The company has also established an operating partnership with Anheuser-Busch in Mexico which has been successful thus far in giving them exclusive Anheuser-Busch distribution rights. Weaknesses: Grupo Modelo currently has no sustainable competitive advantages. This can be a problem for the company due to the high level of rivalry in the industry. The company also has poor inventory management as evidenced by its high days of inventory ratio and its low inventory turnover ratio. Grupo Mode lo also does not have a partner   beer brand supporting them in the United States. Competing companies have been working to establish partnerships in their United States operations, so this represents a  potentially dangerous weakness for Grupo Modelo. Opportunities: Grupo Modelo has the opportunity to use its Mexican roots to capture the large beer-drinking markets in Mexico and in the population of Mexican immigrants to

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the U.S. There is increasing popularity of light beverages and flavored alcoholic  beverages, so it may be beneficial to invest in development of these alternative products. Also, Grupo Modelo may potentially benefit from partnership with Anheuser-Busch as it merges with InBev. This could allow them to continue to expand into other international markets, benefit from economies of scale and distribution networks, and benefit from strong brand recognition. Threats: Grupo Modelo's profitability has some dependency on the Mexican economy and unstable peso. This can dramatically damage the company's profitability if the peso declines in value. There is also a possibility of future increases in taxes and tariffs, which could also damage their financial performance. Though there are potential opportunities that arise from the future potential merger of Anheuser-Busch and InBev, such a large competitor may also pose a threat to Grupo Modelo. It would create a competitor with  better economy-of -scale advantages, and could weaken Grupo Modelo’s position in the market. Also, there is a potential for a loss partnership between Grupo Modelo and Anheuser-Busch.

RECOMMENDATIONS We would recommend that Grupo Modelo develop a reciprocal relationship with Anheuser-Busch to help distribute and promote Grupo Modelo beers in the United States. This method has benefited both Anheuser-Busch and Grupo Modelo in Mexico and it would provide more support to the Grupo Modelo brands and distribution network in the United States. Depending on whether there is a merger between InBev and AnheuserBusch, and depending on the outcome of that merger, Grupo Modelo might benefit from a more co-dependent partnership with this potentially growing company. By expanding internationally into the United States and Canada, Grupo Modelo has already responded to the potential threat created by the volatile Mexican economic and  political environments. We would recommend that they further expand internationally to further diversify these risks. To further expand internationally, we encourage Grupo Modelo to continue its model of contracting with a distributor in the target region. This strategy has benefited the company because the local distributors are able to brand the  beers to their local market needs. We believe that China and Australia are two markets that have great potential for demand of Grupo Modelo's beers. China recently surpassed the U.S. in total beer consumption. There is a huge population that is potential for  demand. Australia is already has high per-capita consumption of beer, so it might be an easy market to enter especially considering the match of brand image of Corona to the typical image of Australian beaches. Within the United States, Grupo Modelo has been presented with an opportunity to appeal to the large population of first- and second-generation Mexican immigrants to the United States. Grupo Modelo can target this market with its Modelo Especial brand, which is especially popular in Mexico. To do so, the company should work with its U.S. distributor to build on its distribution and marketing strengths in the United States. The Grupo Modelo marketing team can contribute its knowledge of Mexican culture to further establish this growing market.

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We also suggest the Grupo Modelo expand its portfolio of "malternatives" in light of the social changes leading to increased popularity of low calorie drinks and flavored alcoholic beverages. The company already has a number of light versions of its beers, but would benefit from increasing the promotion of the advantages and taste of these  beverages. In addition, Grupo Modelo should consider including flavored alcoholic  beverages in its already strong portfolio in order to gain a competitive advantage above competitors that do not offer such drinks. This addition to its portfolio would require Grupo Modelo to expand its procurement of ingredients and make capital expenditures for production space and equipment. However, Grupo Modelo already has the  procurement of bottles and bottle caps, machinery manufacture, and distribution channels to facilitate such an addition to its portfolio. Although for the most part Grupo Modelo is financially stable, we commented earlier that their inventory management appears to need improvement. Effective inventory management can save costs by decreasing the need for storage space and by ensuring that only as much inputs as are needed are purchased. It appears that Grupo Modelo is on the right track with its recent development of e-procurement, demand, and production systems. It is likely that it takes time for the company to understand these systems well enough to effectively implement their use. However, it is possible that we have not seen improvement because employees have not been supportive in adopting these new systems  because of the company's culture or because of the challenges inherent in adoptin a new system.

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References

Grupo Modelo. (2007). 2006 Annual Report. Retrieved 18 November 2009 from http://www.sec.gov Grupo Modelo. (2009). Company Website. Retrieved 18 November 2009 from http://www.gmodelo.com. Reuters. (2009). Retrieved 6 November 2009 from http://www.reuters.com. Som, Ashok. (2007). Corona Beer: From a Local Mexican Player to a Global Brand. In A.A. Thompson, A.J. Strickland, and J.E. Gamble, Crafting and Executing  Strategy (17th ed.), (pp. C-248-C-258). McGraw-Hill Irwin. Yahoo!Finance. (2009). Retrieved 6 November 2009 from http://www.finance.yahoo.com.

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Exhibit 1 (In Millions) Inventories Acounts Recievable Current Assets Depreciation Total Assets

Key Financial Information 2008 2007

2006

$ $ $ $ $

13,355 9,351 38,699 29,427 105,689

$ $ $ $ $

9,504 5,413 38,267 26,721 99,724

$ $ $ $ $

6,961 3,724 35,822 25,126 94,157

Current Liabilities Long-Term debt Total Liabilities

$ $ $

9,518 1,979 25,138

$ $ $

7,663 1,984 17,712

$ $ $

6,431 14,795

Total Stockholder Equity

$

80,551

$

82,011

$

79,362

Revenues COGS Operating Expense Operating Income Interest Profits After Tax Earnings per Share

$ $ $ $ $ $ $

75,363 35,561 20,517 19,284 781 14,811 2.79

$ $ $ $ $ $ $

72,895 32,591 19,715 20,587 1,442 15,368 2.93

$ $ $ $ $ $ $

58,964 26,602 15,501 16,861 1,288 11,737 2.77

Shares Outstanding Annual Dividends per Share Current Market Price Market Cap

$ $ $ $

3,233 2.09 43.78 141,541

$ $ $ $

3,243 2.14 49.29 159,847

$ $ $ $

3,252 1.34 55.35 179,998

Source: Reuters (2009) and Yahoo!Finance (2009)

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Exhibit 2 Financial Ratios 2008

2007

2006

55% 73% 21% 17% 19% 4.74 $

55% 74% 20% 14% 15% 3.61

Profitability Ratios:

Gross Profit Margin Operating Profit Margin Net Profit Margin Return on Total Assets Return on SE EPS

$

53% 73% 20% 15% 18% 4.58 $

Liquidity Ratios:

Current Ratio Quick Ratio Working Capital

4.07 2.66 29,181

4.99 3.75 30,604

5.57 4.49 29,391

23.78% 2.40% 31.21% 2.46% 24.69

17.76% 2.36% 21.60% 2.42% 14.28

15.71% 0.00% 18.64% 0.00% 13.09

137.08 2.66 45.29

106.44 3.43 27.10

95.51 3.82 23.05

4.34% 10.40 45.16% 42,089

2.42% 15.34 37.13% 36,863

Leverage Ratios:

Debt-to-Assets Lont-Term Debt-to-Capital Debt-to-Equity Long-Term Debt-to-Equity Times-Interest-Earned Activity Ratios:

Days of Inventory Inventory turnover Average Collection Period Other Important Ratios:

Dividend Yield P/E Dividend Payout Internal Cash Flow

$

4.77% 9.56 45.62% 44,238 $

$

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