AMERICAN ASSOCIATION OF WINE ECONOMISTS AAWE WORKING PAPER No. 177 Business THE BEER INDUSTRY IN LATIN AMERICA Daniel Toro-Gonzalez May 2015 www.wine-economics.org Daniel Toro-Gonzalez The Beer Industry in Latin America* Daniel Toro-Gonzalez♣ May 2015 Abstract This document presents the current state of the brewing industry in Latin America with special attention given to micro brewing firms. We find that the market conditions in Latin America are favorable to significant growth in the brewing industry and particularly for craft and specialty beers. This study draws on a general overview of the industry in the region as well on five different countries. Key Words: Latin America, craft beer, microbreweries, industry structure. Introduction Preferences for liquor are highly differentiated among Latin American countries. Wine is the most popular alcoholic drink in Chile, Uruguay and Argentina, while spirits such as pisco is preferred in Peru and rum is the signature liquor in Central America and the Caribbean. In the region beer has an important participation to; it is the most preferred alcoholic beverage in almost half of the Latin American countries. Currently, beer market may be characterized worldwide by a substantial decline of per capita beer consumption in traditional markets, and a shift to new products (Swinnen, 2011) and, as it will be analyzed later, by the consolidation of an oligopoly with strong growth in emerging economies such as Latin America. Latin America is not precisely recognized worldwide by strong brewing traditions, in fact, according to Webb and Beaumont, Latin American beer may be described by three basic * This research was made possible thanks to the help of Mauricio Anillo as a research assistant. The analysis in the chapter is based on the Euromonitor International © database unless referenced. ♣ Associate Professor at the School of Economics and Business, Universidad Tecnologica de Bolivar Cartagena, Colombia, Phone +57 300 7565976, [email protected] 1 Daniel Toro-Gonzalez criteria: it is clear and flavorless, it is served cold, and it is produced by a big mass produced brewery, often, a multinational company. However, these authors also recognize the opportunity for market development in which the increase in the number of micro and craft breweries is a phenomenon that follows the same structural market pattern witnessed at the North American beer industry (Webb & Beaumont, 2013). This chapter focuses on the brewing industry in Latin America, with special attention to the microbrewing segment. We first present a review of the state of the art in the field for the region, followed by the review of five country cases where the relevance of the craft and microbrewery segment has been identified. We will show then how the change in Latin American consumer preferences, growth of income level, and consolidation of the mass-produced beer industry, are all elements lining up in favor of the growth of micro and craft breweries in the region. Brief History Consumption of alcoholic beverages in Latin America, specifically in the Andean region including today countries of Colombia, Peru, Chile, Ecuador date pre-Columbian times. There is evidence that “…the earliest pottery… dating back to ca. 5000 B.P., was likely intended for chichas, [alcoholic beverage] primarily made from corn” (Penn Museum, 2015). Another traditional beverage Pulque was produced with fermented sap of the maguey plant (Pierce & Toxqui, 2014). Pulque and Chicha were the most popular alcoholic drinks in America by the time of the discovery in 1492, and Chicha was the Latin American beer, especially in South America. However, the first “official” brewery in the new world after the arrival of Christopher Columbus was stablished between the years 1542 and 1554 in the region of Anameca, southeast of the current location of México city. The conquer Alfonso de Herrera was authorized by the King Carlos V to produce and sell beer (Verti, 2002) and (Reyna & Krammer, 2012). We assume this brewing tradition continue somehow until the XIX century, when according to Reyna and Krammer “…the demand for beer increase, displacing the more traditional pulque”. Production of beer continues in the new world up to these days. America, as a continent, has increased its participation in the world beer market steadily since we have recorded data. In the late nineteen century, 1880, America’s market share was equivalent to the 13% of the world market. The most up to date statistics of production indicates that in 2013 the participation of the American continent (South, Central and North) is equivalent to almost a third (29%) of the global market, and the perspectives are in many ways promising for the growth of the product in the region (Figure 1). 2 Daniel Toro-Gonzalez Figure 1 Beer ProducBon by Connent 1820-2013 100% 80% 60% 40% 20% 0% 2008 2009 2011 2013 1880 1900 1920 1940 1960 1980 2000 2010 2012 Europe America Africa Asia Oceania Source: Calculations based on (Swinnen, 2011) and (Statista, 2015) Mass Produced Beer Mass production has led to the standardization of beer to the point where consumers “…cannot perceive the taste differences between the more generic mass-market pale lager brands” (Campbell & Goldstein, 2010). Specifically, in the last decade, beer industry has witnessed a dramatic change in terms of market concentration. At the dawn of the XXI century, ten firms combined sum up approximately half of global sales of beer, however, by the year 2012 the same share was divided among just four firms (Howard, 2013). This is evidence that brewing industry shows an interesting trend towards worldwide concentration due to economies of scale and horizontal integration, at least in the case of mass produced beer, and Latin America is not an exception. In spite of the lack of information for the industry, we were able to identify some evidence related to the concentration process in Latin America. According to the Euromonitor International data, the Herfindahl-Hirschman Index (HHI) for the worldwide beer industry in 2013 was 896, which is considered as a competitive industry according to the Federal Trade Commission (FTC) parameters. However, the index has increased significantly between 2009 and 2013, from 815 to 896 (10%) points. Another way to verify industry concentration is by the use of the C4 concentration index from which we verify that four firms (AB-InBev, SABMiller, Heineken and Carlsberg) control 40.2% in 2009, and this market share has increased to 44.7% in 2013. Even though worldwide industry concentration is still low, in Latin America trend towards concentration is stronger. According to Howard, “the markets of industrialized countries 3 Daniel Toro-Gonzalez of Western Europe, North America and Japan remain important to the industry, but few firms remain as targets for acquisitions in these regions. The focus has instead shifted to emerging markets in Asia, Africa, Eastern Europe and Latin America”. Hence, since growth in mature markets seems to be slowing down, mass breweries are expanding towards a more dynamic emerging markets. The strategy “…entering these markets can be much easier and cheaper via acquisitions or joint ventures with domestic firms, rather than increasing imports or constructing new brewing facilities” (Howard, 2013). Today Latin America can be categorized as a beer drinking continent. Out of the 23 Latin American countries recorded by the WHO, 48% of the countries (11) may be catalogued as beer drinkers because the market share of beer is higher than the market share of spirits or wine. 39% of the countries may be catalogued as spirit drinkers countries, and only in three countries, that represent 13%, wine consumption surpassed spirits and beer (WHO, 2014). Between 2008 and 2013 in terms of the size of the regional market, Latin America represents on average 15.9% of the world market on beer. Figure 2 presents the Herfindahl-Hirschman Index (HHI) for the region, with an estimated value of 2045, considered as a “moderately concentrated” market according to the FTC merger guidelines. Specifically, for all the five countries represented in the figure, the industry is “highly concentrated”, because the parameter values for the HHI are above 2500 points. Currently, 89.6% of the Latin American beer market by volume is produced by seven countries: Brazil, México, Colombia, Argentina, Chile, Venezuela and Peru. In the last decade, with the arrival of multinational companies to the region, the war for Latin American market has intensified. Most of the countries have now duopolistic markets mainly dominated by big world players. For the year 2013, the top three firms in terms of market shares were Anheuser-Busch InBev (AB-InBev) with 47.6% of the market, Heineken with 14% and SABMiller with 13.6% of the market (Euromonitor, 2015). However, despite the seemingly clear trend to higher levels of beer industry concentration in the region, for Howard, there are still some barriers to the consolidation of a worldwide oligopoly or even a duopoly to be consider. Specifically, “…cultural barriers to global brands in emerging markets, and the rising consumer interest in varieties produced by smaller specialty brewers in mature markets” (Howard, 2013). Small and Microbreweries 4 Daniel Toro-Gonzalez In spite of the clear trend to concentration of the mass-produced beer, Latin American markets started to witness the birth of a craft beer industry in the hands of small and microbrewers. The lack of information about these types of establishments is an important impediment to analyze this segment properly, however, some evidence points out to the clear future of the market. Figure 2 Average Industry Concentration 2008-2013 HHI C4 9851 99.9 97.1 97.0 98.4 94.7 5953 5773 80.6 4518 4444 2045 Argenqna Brazil Chile Colombia Mexico Lan Argenqna Brazil Chile Colombia Mexico Lan America America Source: (Euromonitor, 2015) Based on Euromonitor information related to small breweries, we may have an idea of the industry performance in the segment of craft beers.