Foundations of Business StrategyClient: Cervecería Centroamericana SAPresented by: Delmy AlvarengaDate: Jun. 27th, 2016�

Introduction

Cervecería Centroamericana SA is a well established company in Guatemala with 125 years in the market. Its wide porfolio covers from alcoholic beverages, especially beer; to soft drinks (bottled water, natural juices); to packaged food (snacks). For the purpose of this analysis, the scope of the alcoholic drinks industry and the company main portfolio, we will focus on the beer industry.

Firm’s Background: A monopoly story.

Cervecería Centroamericana SA, associated with the iconic rooster head to be found on beer bottles, tables, chairs, t-shirts, and other merchandising, represents one of Guatemala’s most enduring and easily recognisable brands: Gallo, a 5% ABV pale lager, the oldest produced beer since 1896. It is also owned by one of Guatemalan’s wealthiest and most powerful families, the Castillos, an oligarchic family whose company vision “believes and trust in the Guatemalan people motivating them to keep on investing in Guatemala.”1

For over a century, Cervecería Centro Americana held the monopoly on the production and sale of beer in Guatemala. They gained market competitiveness by keeping the prices high compared to other products in the market and imposing the law on their side. For instance, micro-brewers making a few kegs of beer for a local bar would run the risk of receiving a visit from Gallo’s legal team who could prosecute them on any number of grounds given that the Cervecería held not only a monopoly on beer, but also on beer bottles, beer taps, beer fridges and beer kegs.2

This monopoly ended in 2004 when Brazilian Company AmBev entered the Guatemalan market with their signature Brahva beer.

Category Background: The War on Price.

Ambev, now Anheuser-Busch InBev, the world’s largest brewer with a 25% share of the global market and annual revenues of over $1 billion entered the market in 2004 with a clear objective to win over the Centralamerican beer drinker.

They are responsible for the production of more than 200 brands, including Budweiser, Corona, Stella Artois, Beck’s, Quilmes and Presidente. It’s their size what allows them the luxury to drop prices to acquire market segments, and this has been their chosen strategy for gobbling up national beer companies who cannot keep the battle with such fierce competition.

Guatemala has one of the fastest growing markets for beer in the Americas (Exhibit 1). By 2015, Ambev already owns 25% of the Guatemalan beer market (Exhibit 2), forcing the Cervecería Centroamericana SA to bring out their budget beer Dorada Ice in an attempt to compete with Brahva’s rock-bottom prices (Exhibit 3). AmBev responded by pouring even more money into the market: in October last year, they announced an investment of $100 million for the next three years. The Cervecería Centroamericana SA

Conoce Cervecería. En qué creemos. http://www.cerveceriacentroamericana.com/conoce-la-cerveceria/en-que-creemos-credo/1

Beer Wars. http://xelawho.com/?p=203962

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relies on the national pride of Guatemalans to maintain their market dominance, keeping their strategy aligned to their company’s vision “We Believe, Trust and Invest in Guatemala”. By the end of 2015, the 3 4

average unit price declines by 2%.

This beer war led to a real crisis on the consumers: it’s their national pride versus their wallet. Many consumers quckly disregar Brahva due to it’s taste, but when it comes to drinking, the struggling economy leads them to consider Brahva, sacrificing taste and their national pride.

By May 2016, Euromonitor reported that the price war that had affected the competition between leading companies Cervecería Centroamericana SA and AmBev Centroamérica SA is over. The average unit price of beer has been lowered so much that consumers now buy beer based on their taste preference rather than on the lowest unit price.

Competitive Landscape

By 2015, domestic company Cervecería Centroamericana led beer with a total company share of 72%. This dominance is partly due to its first mover advantage. The company’s dominant position was also built on its competitive pricing strategy, extensive distribution network and a broad portfolio that includes well-established local and international brands, such as Gallo, Dorada, Monte Carlo, Sol, Victoria and Heineken.

The international competitor AmBev Centroamérica (formerly Cervecería Río SA), which offers the Brahva range, entered the market in 2004. In 2015 AmBev was the second leading beer player with a total volume share of 25%. Other prominent competitors include Industrias Tripoli SA, Cervecería Cuauhtemoc Moctezuma SA de CV, Industrias Licoreras de Guatemala SA and Distribuidora Alcazarén SA. (Exhibit 2).

Beer in Guatemala —Competitor’s Analysis

Focal FirmPerformance

Metrics (as of 2015)

Capabilities Objectives/Values Strategy

Cervecería Centroamericana SA

Company Share 72.4%

Strong brand identification.Wide range of innovations.

Seasonal SKUs

We believe, trust and invest in Guatemala.

Competitive pricing, extensive distribution

network & broad portfolio (well-

established local & intl brands).

Ambev Centroamerica SA

Company Share 25.2%

Low price strg.Wide array of

premium Imports

Create enduring bonds with

consumers and clients, providing

them with the best brands, products

and services.

Low prices, brand building for new entries, broad

premium brand offer to develop premium segment consumers.

Distribuidora Alcazarén SA

Company Share 0.3%

Premium beer imports No info. available.

Premium beer imports from

Germany.

Beer Wars. http://xelawho.com/?p=203963

Conoce Cervecería. En qué creemos. http://www.cerveceriacentroamericana.com/conoce-la-cerveceria/en-que-creemos-credo/4

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Environmental Analysis

Beer in Guatemala —Environmental AnalysisDemographic Trends - Men aged 18-45 are the main consumers of beer in Guatemala.

- It is expected that upscale restaurants and bars will increase the portfolios of beers that they offer, to supply the demand of more sophisticated products and flavours that is emerging.

- Beer, spirits and wine are benefitting from consumers’ premiumisation in the tastes and products they are demanding. This trend is stronger amongst middle- to upper-class consumers who have higher disposable incomes and are demanding more sophisticated imported products in categories such as premium imported beer, tequila, whiskies, gin and vodka.

- Imported premium lager is expected to have the strongest volume growth. Upper-class consumers are becoming more sophisticated in the beers they want to try and purchase, and this trend is causing strong growth within imported premium lager.

Socio-cultural Influences - Guatemala has a very small participation of dark beer. - Cervecería Centroamericana SA is focusing on attracting different segments:

all the line extensions it launched during 2013 and 2015 have been targeted towards different audiences and different palates.

- Cervecería Centroamericana launched Dorada Draft Michelada con un toque de Chiltepe (a popular chilli pepper in Guatemala) and Stats Blueberry (a summer in-and-out promotional product).

Technological Developments It is expected that craft beer will begin to emerge in the market due to the consumers’ continuing appreciation of and curiosity about the different flavours, aromas and beer types, in conjunction with the ongoing brew shops trend.

Macroeconomic Impacts NO INFO. FOUND

Political Pressures NO INFO. FOUND

Global Trade Issues NO INFO. FOUND

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Five Forces Analysis

Beer in Guatemala —Five Forces AnalysisThreat of Entry

- There are only two breweries in Guatemala: CCA and AmBev Centroamérica. These companies are expected to continue to make alliances with international brewers to become exclusive distributors of important brands.

- Threat of entry is really high since these two companies dominate the market, in prices, exclusive distribution, premium brand import and ecnomoy beer sales.

- Craft beer is market opportunity, since consumers continue appreciate and are curious about the different flavours, aromas and beer types.

Bargaining Power of Suppliers

- Independent small grocers outnumber other types of retail outlets in Guatemala and continue to dominate retail distribution of beer in 2015 with an off-trade volume share of 79%.

- They often offer credit facilities to regular customer creating a loyal base of demand on bottle and canned beer.

- It is expected that upscale restaurants and bars will increase the portfolios of beers that they offer to supply the demand of more sophisticated products and flavours that is emerging.

Intensity of Rivalry

- Imported premium lager had the strongest volume growth of 27%.

- AmBev Centroamérica distributes Mexican beer Corona. The brand has a very strong volume growth.

- Companies such as Distribuidora Alcazarén SA are importing premium beers to satisfy a growing niche of consumers who want to buy global beers.

- Threats to growth are definitely price and promotions, as prices have plateaued, if prices recuperate too rapidly, sales will fall, but if the price stays the same, the market size could continue to grow.

Bargaining Power of Buyers

- The war price lead by Cervecería Centroamericana SA and AmBev caused beer prices to drop considerably and volume to increase considerably.

- In 2015 this price war came to an end, mainly because consumers have buying power, purchasing alcoholic drinks based on their preferences and not just prices.

- Overall, consumer’s bargaining power has increased as their palates are becoming more sophisticated and they are demanding a wider variety of products and flavours.

Threat of Substitutes

- Aguardiente, rum and spirit-based RTDs are the categories that were the most impacted by the price war between Cervecería Centroamericana SA and AmBev Centroamérica.

- It is presumed that in 2016 players in spirits and RTDs will launch aggressive campaigns and promotions to try to recover their lost volume and recuperate consumers.

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Firm Capabilities

Cervecería Centroamericana —Firm CapabilitiesCapabilities National Brands Broad portfolio Innovation Distribution

Processes

- First mover advantage.

- Leadership is consolidated due to their local brands strong positioning.

- The company has a wide product portfolio ranging from economy to premium products.

- Product differentiation through seasonal innovations.

- New flavours to reach niche markets.

- Strong distribution chains that allow them to reach stores across the country, both in urban and rural areas.

People

- Product differentiation, seasonal innovations.

- New flavours to reach niche markets.

- Qualifid research team to develop new seasonal flavors.

Systems

- Strong distribution channel to supply both on-trade and off-trade channels.

- Alliances with international brewers to become exclusive distributors of important brands.

- High investment in R&D to identify how consumers’ palate is evolving and what flavours they are demanding.

- Glass bottles allows them to reach small independent grocers and facilitate sales.

Alignment & Sustainability

- Constant launch of seasonal in-and-out promotional beers.

- Exclusivity on restaurants & on-trade channels.

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Exhibit 1. Market Sizes | Historical | Total Volume | Year-on-Year Growth (%)

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Exhibit 2. Company Shares of Beer: % Total Volume 2011-2015

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Exhibit 3. Brand Shares of Beer: % Total Volume 2012-2015

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Source:

https://en.wikipedia.org/wiki/Cervecer%C3%ADa_Centro_Americana

http://www.cerveceriacentroamericana.com/conoce-la-cerveceria/en-que-creemos-credo/

http://www.euromonitor.com/beer-in-guatemala/report

http://www.centralamericadata.com/en/article/home/The_Beer_Market_in_Guatemala

http://xelawho.com/?p=20396

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