Corona. Sustaining a Competitive Edge. Principles of Marketing 8/11/09 Scopeout IV. Rebecca McCabe

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1 Corona Sustaining a Competitive Edge Principles of Marketing 8/11/09 Scopeout IV Rebecca McCabe

2 I. Situational Audit A. Industry Analysis: Beer 1. Market Structure The beer industry developed differently in every country in order to address local tastes and specific recipes, and ended up clustering with many local breweries. Determining factor behind the type of domestic beer was the national taste of the particular country. In the 1990s, national leaders began expanding abroad due to the requirement of high startup costs, a need for constant cash flow for maintenance, and changing prices of resources. In 2004, the world s third largest brewery company, Belgium-based Interbrew, and the world s fifth largest brewery, Brazil-based Amber, planned to merge their operations. In 2005, the top brewing companies (in millions of hl) were InBev, Anheuser- Busch, SABMiller, and Heineken. a. United States Market The United States had the largest beer market in the world until China surpassed it in However, the consumption per capita remained six times higher in the U.S. Three breweries that controlled about 80% of the U.S. market were Anheuser- Bush with 45%, Miller Brew with 23%, and Adolph Coors with 10%. There were 300 craft breweries still remaining throughout the United States. In 1996, Modelo spent $5.1 million in advertising expenses, which paled in comparison to Anheuser- Bush's budget of $192 million, and Heineken's $15.1 million budget. b. Mexican Market As one of the largest beer markets in the world and 11 th most populated country, Mexico's beer market offers a wide variety of brands and tastes. The two companies with a duopoly in Mexico were FEMSA, with 37.2% of the market, and Grupo Modelo with 62.8% of the market. 2. Competitor Analysis Modelo's competition ranges in both size and scope. In 2005, Corona ranked forth among the world's top 10 beer brands (in millions of barrels shipped), preceded by Bud Light, Budweiser, and Skol. However, unlike Budweiser, which had a -3% decrease in market share, Corona recognized a 2.1% increase in market share, showing promise for the future. A main competitor in the United States was Heineken, that had the prestige of a well-established brewery with a rich, quality taste.

3 Competition also included the two global giants, InBev and Anheuser-Busch who had the advantage of economies of scales, resulting in higher advertising budgets, greater market share, and increased tax efficiency. 3. End-User Analysis A key marketing idea that boosted Corona's success in the United States was focusing on people who found the idea of leaving behind everyday life for a relaxing one appealing. Unlike other beers, Corona emphasized that their beer was for anyone: male, female, beer-drinker, or non-beer-drinker. The user could find the beverage sold in bars, restaurants, convenient stores, etc. Consumers were located in both Mexico and the United States. B. Enterprise Analysis: Grupo Modelo 1. Administrative Heritage Grupo Modelo was formed on March 8, 1922 and officially opened its first brewery 3 years later with an aim on Mexico City and its surrounding areas. Oavki Duez Ferbabdez bought his partner's shares and became sole owner of the company in 1936, with financial assistance from the Banco Nacional de Mexico. The company has been in the family ever since. Cerveceria Modela bought the brands and assets of the Touca y Mexico Brewery, including Victoria, the country's oldest established brand of beer. Modelo s first entry in to the United States beer market came in 1979, originally distributed by Amalgamated Distiller Products Inc. Popularity began in the southern states, and spread to become the second most popular beer in the U.S. in In 1991, the federal excise tax on beer doubled, causing Corona's rise to the top of the market to drop 15%, a cost that was absorbed by the distributor rather than being passed down to the consumer. In 2007, Grupo Modelo was exporting five types of beer to the U.S.: Corona Extra, Corona Light, Modelo Especail, Pacifico Clara and Negra Modelo. Grupo Modelo captured 62.8% of the Mexican market. Chicago-based Barton Beers Ltd. served as the company's western distributor and Gambrinus Inc. was the company's eastern distributor. These distributors were responsible for almost all activities involving the sale of beer, but the actual production of the beer was done in Mexico. 2. Employees Pablo Diez Fernandez, Braulio Iriarte and Martin Oyamburu were the heads of the company, and eventually, Diez became the sole owner in the early 1930s. Antonio Fernandez Husband of Pablo's niece, Antonio was appointed CEO of Modelo in 1971.

4 Put the company under the Mexican Stock exchange in 1994, but made sure to give his family the majority of voting rights in the company. Carlos Fernandez Grew up with the family business since the age of 12, and became very well situated with it. CEO of Grupo Modelo's since Had a vision of expanding the company to an international business model and streamlining their focus. 3. Financing The 1930s were difficult years for Modelo because of the prohibition policy and the death of its president, but after refinancing, the company had financial stability once again in The 1940s were a period of tremendous growth for the company, with high production and growing popularity. Antonio Fernandez put the company on the Mexican Stock exchange in 1994, where Anheuser-Busch acquired 17.7% of the equity, and was given the option of increasing to 50.2% over time. In 2005, the company had a 54% return on sales (profit margin). In just one year, from 2004 to 2005, the company had a 12.3% increase on exported beer, a 7% increase on net sales, and 17.8% increase on dividends per common share, showing their stability and profitability. 4. Capabilities Audit a. Core Strengths Grupo Modelo was Mexico s largest beer producer and distributor. Corona Extra was the world s fourth best selling beer in terms of volume. Three of Grupo Modelo's brands ranked among the top 10 highest importers in the United States. Grupo Modelo captured 62.8% of the Mexican market in Grupo Modelo had an excellent distribution network set up in the United States, and had successfully captured a good amount of the American market through its marketing efforts. b. Core Weaknesses In the Mexican market, Modelo's beer paled in comparison to its close competitor, FEMSA in terms of consumer preferences in tastes of beer. In order to import beer into the United States, the company had to pay a high tax, a disadvantage when compared to local American breweries. The company did not have enough capital to have an advertising budget in the range of major brands like Anheuser-Bush and Heineken.

5 Grupo Modelo did not have the credibility of a well-established brand like Heineken, whose beer was viewed as high quality and whose brand defined a category. C. Product Development Analysis: Corona Produced Corona in clear quarter bottles in response to consumer preference. Transportation of the beer, insurance, custom clearance, pricing strategy and creativity of the advertising campaign were the American importer s responsibility. Corona's marketing campaign was centered around the idea of fun in the sun and "miles away from ordinary." II. Problem/Decisional Statement As the best selling beer in the U.S. and 4 th best in the world, with a 56% market share in Mexico, what strategy should Carlos Fernandez, the CEO of Grupo Modelo since 1997, and the rest of Grupo Modelo use to not only stay afloat in the ever-changing, quickly consolidating global beer market, but also continue at, or increase their current 11.1% (American) growth rate to effectively compete against key global players such as InBev and Anheuser-Busch, who have better economies of scale, a higher marketing budget and greater market share, by considering distribution channels, markets, management, marketing, and company structure in both their Mexican and American markets? III. Heuristic Frames 1. Grupo Modelo could enter a partnership with or allow a take-over by a large global player such as InBev or Anheuser-Bush in order to acquire the necessary start-up costs of new breweries and steady cash flow for maintenance in order to significantly grow in size and sustain a competitive edge. 2. Carlos could focus his company's efforts on product diversification by developing better tasting 'premium' beer to essentially reach new markets that value quality and taste. 3. Modelo could expand its product-market space by diversifying the perceived needs that the beer satisfies through an increase in spending on marketing efforts. 4. Modelo could merge with its main Mexican competitor, FEMSA, a company with superior distribution channels and a recent marketing agreement with Heineken, to better penetrate the U.S. Market while maintaining a solid footing in Mexico. 5. Modelo should look to FEMSA's method of acquiring convenient stores as distribution channels, and follow suit by cross subsidizing to either acquire or establish their own points of purchase. IV. Issue Analysis A. Frame 1: With the ever-increasing trend of mergers and acquisitions, Grupo Modelo will gain the economies of scale necessary in order to effectively compete in the global market.

6 Along with economies of scale, the company could acquire a greater market share and increased tax efficiency. The company could greatly improve performance and increase shareholder value in the long-term. By merging with a large company, Modelo can benefit from pre-existing distribution channels that its partners have already established. Merging with a foreign company could result negatively with cultural barriers and disparities in an overall mission. Managerially speaking, the companies could come from two separate schools of thought, resulting in mixed messages passed onto lower levels of the company. Modelo has a track record of maintaining solid control of its American importers, and may find it difficult to let up on some of its control upon acquisition. Considering delicate and intricate process of mergers, it may not be the right time to take such a leap. B. Frame 2: Currently, Modelo's best tasting beer in Mexico is ranked 11 th, overwhelmingly preceded by its close competitor, FEMSA. Though the company's marketing efforts make up for the beer's less than superior taste, by developing a more quality product, the company could greatly broaden its market and increase sales. With Modelo's close U.S. competitor Heineken, emphasizing their superior taste and quality, and brewing a new market strategy, Corona could stay on top of the market with both a superior product and market space. With Corona at the company's core in terms of sales and brand awareness, introducing a new adjacency may detract from the core, especially if it fails. Introducing a new product could prove to be very expensive in terms of development, testing, marketing, etc. C. Frame 3: As Michael Foley of Heineken stated, "People don't drink beer, they drink marketing." Corona has seen the superior effects of marketing on their sales and broad range of consumers, a proven route to success. Corona must have a good team of marketers and advertisers who if given more funding, could produce an even more effective campaign that surpasses companies with larger advertising budgets. Even with an increase in spending on marketing, Modelo may not recognize a greater profit margin. Larger companies such as InBev have greater resources and more capital, allowing them a greater budget for advertising. Corona may not be able to compete with this.

7 Even with great marketing, if the product is not what people are looking for, Corona will not penetrate this area of the market unless they look into product development. D. Frame 4: Not only do Grupo Modelo and FEMSA share a common Mexican culture, they could also benefit from being so close in proximity. By merging together, the companies could achieve such economies of scales to better penetrate other markets outside of Mexico and compete with top global companies. While Grupo Modelo has always been superior in marketing and distribution in the U.S., FEMSA has always been superior in the actual taste and quality of the beer as well as distribution channels in Mexico. Together, they could make a very powerful company. Grupo Modelo and FEMSA have been rivals for so long that it may be difficult to merge as one. While similar in Mexican culture, the corporate cultures of the two companies may clash and lead to ineffective management. FEMSA has always done the majority of its business in Mexico. If the companies do business outside of Mexico, they could experience negative financial effects because of the devaluation of the Peso. E. Frame 5: In terms of distribution, FEMSA has been very successful as a result of their ownership of convenient stores throughout Mexico, which makes it much easier to distribute their beer. Not only would acquiring stores throughout Mexico and/or the United States serve as primary points of purchase, they would also serve as an additional source of revenue. Diversification is key in the new global economy. Acquiring a chain of pre-existing stores or establishing new ones would require high start-up fees, which may prove difficult to acquire. Venturing out into a new business category could be risky and may significantly hurt the company. Modelo may lose their focus on their core product, beer, which is key to their success. V. A. Recommendation Frame 4: Modelo could merge with its main Mexican competitor, FEMSA, a company with superior distribution channels and a recent marketing agreement with Heineken, to better penetrate the U.S. Market while maintaining a solid footing in Mexico. 1. Dynamics of Environment

8 The beer industry is rapidly moving towards mergers and acquisitions, making it harder for smaller companies to attain the resources and capital necessary to effectively compete. Joining with FEMSA would be a great option for Modelo Grupo because it would be moving them with this common trend of consolidation. 2. Corporate Vision and Mission Modelo Grupo has a vision, rooting back to 1997 when Carlos Fernandez was appointed CEO, of the company taking on an international business model and streamlining its focus. This plan of joining with FEMSA, though inorganic growth would help the company in taking its company even further into an international business model because it would achieve supporting economies of scale. With recent renovations to increase the capacity of its brewing facilities, Corona would be able to more efficiently distribute this influx of beer. 3. Feasibility Located in the same country as FEMSA, joining together would not be such a difficult task simply because of proximity. The two companies share a common Mexican culture, making the likelihood of a successful merger greater as opposed to joining with say, a Dutch or German company. The two companies both have a vision of greatly penetrating the United States market while also continuing to focus efforts in Mexico, a commonality that will make the merge much easier. B. Implementation Frame 4: Modelo could merge with its main Mexican competitor, FEMSA, a company with superior distribution channels and a recent marketing agreement with Heineken, to better penetrate the U.S. Market while maintaining a solid footing in Mexico. 1. Targeting/Positioning Statement Corona will target both American and Mexican men and women over the age of 21 who are drawn to the idea of getting away from everyday life to go to a relaxing one, and who enjoy the light citrus taste of Corona. 2. Product Sub-Mix What need does it serve: Brings consumers to a separate state of mind, one that is relaxed and more carefree. Core product: Mexican beer. Basic brand: Corona, a brand owned by Modelo Grupo. Extended or augmented product: Corona Extra and Corona Light are both types of beer that enable people to enter a certain frame of mind. 3. Price Sub-Mix

9 Since Modelo is joining with FEMSA, they will achieve economies of scale, and will hopefully be able to lessen the price of their product. Even though the beer will most likely costs less to distribute in Mexico, the company should keep the prices equivalent to those in the U.S. to keep the brand image in line as a more quality beer. Keeping the prices up in Mexico will also make up for the potentially high distribution costs in the U.S. due to taxes, etc. 4. Distribution Sub-Mix With FEMSA's superior distribution channels throughout Mexico, Modelo will most likely be able to reduce their distribution costs in Mexico. Modelo Grupo can continue to use its own distribution channels in the U.S., since they are so well established already, but can offer to share these channels with FEMSA in hopes of reducing costs. Corona along with FEMSA can continue to put their products in bars, restaurants, package stores, and convenient stores, but may choose to expand FEMSA's convenient stores into the United States as yet another point of purchase for consumers and source of revenue. 5. Promotion Sub-Mix Corona has been very successful with its "fun in the sun" campaign, and more recently, its "miles away from ordinary" campaign. Corona should continue along these same lines of escaping from ordinary life to go somewhere tropical, out of the ordinary, and relaxing. The company could also integrate an image of being premium, or a "luxurious escape" to coordinate with its higher prices that are due to fees related to importing the product into America.