alcoholic drinks in mexico

ALCOHOLIC DRINKS IN MEXICO

Euromonitor International

December 2011

A L C O H O L I C D R I N K S I N M E X I C O P a s s p o r t I

© E u r o m o n i t o r I n t e r n a t i o n a l

LIST OF CONTENTS AND TABLES

Executive Summary ..................................................................................................................... 1

Economic Recovery Becomes More Evident in 2011 ............................................................... 1 Aspirational Consumers Reshape Map of Alcoholic Drinks ...................................................... 1 Multinational Presence See Great Advance in Mexico With Heineken ..................................... 1 Home-drinking Trend Supports Dominance of Off-trade Channel ............................................ 1 Brighter Perspectives in Coming Years .................................................................................... 2

Key Trends and Developments .................................................................................................... 2

Beer Manufacturers Strive for Diversity .................................................................................... 2 Packaging Trends Revive Interest in Alcoholic Drinks .............................................................. 4 National Insecurity Promotes Home Drinking ........................................................................... 6 Players Continue To Invest in Advertising Campaigns ............................................................. 8 New Rules of the Game May Alter Market Dynamics ............................................................. 10 Key New Product Launches ................................................................................................... 12

Summary 1 Key New Product Developments 2010-2011 .............................................. 14

Specialist Retailer ................................................................................................................... 18

Summary 2 Leading Specialist Retailers 2011 .............................................................. 20

Market Merger and Acquisition Activity ................................................................................... 20 Market Background .................................................................................................................... 22

Legislation .............................................................................................................................. 22

Table 1 Number of On-trade Establishments by Type 2006-2011 .......................... 24

Taxation and Duty Levies ........................................................................................................... 25

Table 2 Taxation and Duty Levies on Alcoholic Drinks 2011 .................................. 25 Table 3 Typical Wholesaler and Retailer Off-trade Mark-ups by Selected

Categories 2011 ......................................................................................... 26 Table 4 Selling Margin of a Typical Beer Brand 2011 ............................................. 26 Table 5 Selling Margin of a Typical Wine Brand 2011 ............................................. 26 Table 6 Selling Margin of a Typical Spirits Brand 2011 ........................................... 26

Operating Environment............................................................................................................... 27

Contraband/parallel Trade ...................................................................................................... 27 Duty-free ................................................................................................................................. 28 Cross-border/private Imports .................................................................................................. 28

Market Indicators ........................................................................................................................ 28

Table 7 Retail Consumer Expenditure on Alcoholic Drinks 2006-2011 ................... 28

Market Data ................................................................................................................................ 28

Table 8 Sales of Alcoholic Drinks by Category: Total Volume 2006-2011 .............. 28 Table 9 Sales of Alcoholic Drinks by Category: Total Value 2006-2011 ................. 29 Table 10 Sales of Alcoholic Drinks by Category: % Total Volume Growth 2006-

2011 ........................................................................................................... 29 Table 11 Sales of Alcoholic Drinks by Category: % Total Value Growth 2006-

2011 ........................................................................................................... 29 Table 12 Sales of Alcoholic Drinks by Category by On-trade vs Off-trade Split:

Volume 2011 .............................................................................................. 29 Table 13 Sales of Alcoholic Drinks by Category by On-trade vs Off-trade Split:

Value 2011 ................................................................................................. 30

A L C O H O L I C D R I N K S I N M E X I C O P a s s p o r t I I


Table 14 Sales of Alcoholic Drinks by Category by On-trade vs Off-trade Split:

% Volume 2011 .......................................................................................... 30 Table 15 Sales of Alcoholic Drinks by Category by On-trade vs Off-trade Split:

% Value 2011 ............................................................................................. 30 Table 16 Company Shares of Alcoholic Drinks by Global Brand Owner 2007-

2011 ........................................................................................................... 30 Table 17 Off-trade Sales of Alcoholic Drinks by Distribution Format: % Value

Analysis 2006-2011 .................................................................................... 31 Table 18 Off-trade Sales of Alcoholic Drinks by Category and Distribution

Format: % Volume Analysis 2011 .............................................................. 31 Table 19 Forecast Sales of Alcoholic Drinks by Category: Total Volume 2011-

2016 ........................................................................................................... 32 Table 20 Forecast Sales of Alcoholic Drinks by Category: Total Value 2011-

2016 ........................................................................................................... 32 Table 21 Forecast Sales of Alcoholic Drinks by Category: % Total Volume

Growth 2011-2016 ..................................................................................... 32 Table 22 Forecast Sales of Alcoholic Drinks by Category: % Total Value

Growth 2011-2016 ..................................................................................... 33

Definitions ................................................................................................................................... 33

Published Data Comparisons ................................................................................................. 34

Summary 3 Research Sources ...................................................................................... 34

A L C O H O L I C D R I N K S I N M E X I C O P a s s p o r t 1


ALCOHOLIC DRINKS IN MEXICO

EXECUTIVE SUMMARY

Economic Recovery Becomes More Evident in 2011

As a result of the stronger signs of economic recovery, volume and current value sales of

alcoholic drinks rose notably in 2011. The volume performance was higher than the review

period CAGR as Mexicans felt more confident regarding the general economic situation.

Manufacturers of brands across beer and spirits continuously invested resources in the

marketing and image of their products, and started to reap the benefits in 2011. Meanwhile, a

culture oriented towards sophistication of drinking habits with educational campaigns, highly-

qualified staff in specialist retailers and a number of specialised publications continued to

sustain the dynamism of wine.

Aspirational Consumers Reshape Map of Alcoholic Drinks

The phenomenon of aspirational consumers who strive to trade up to high-quality and

premium products is reshaping the competition dynamics of alcoholic drinks. This is particularly

evident in spirits. Although mature categories such as tequila still account for the bulk of spirits

sales, it has consistently lost ground to rapidly-developing categories such as whiskies, bitters,

vodka and mezcal. Most notable is whiskies, consumption of which among Mexicans increased

exponentially over the last decade, and came to represent 12% of total spirits‟ volume in 2011,

up from only 1% in 2000. Whisk(e)y products represent the most fashionable drinks in Mexico,

with privileged recognition among aspirational consumers eager to follow the latest global

trends.

Multinational Presence See Great Advance in Mexico With Heineken

The presence of multinational players, historically linked mostly to the participation of global

brands in spirits and wine, saw a breakthrough with the arrival of Heineken NV‟s operations in

Mexico after its acquisition of FEMSA. Although the immediate effect was registered from 2010,

when Heineken Mexico accounted for a 38% volume share the total alcoholic drinks market, in

2011 the multinational player consolidated its presence to account for a volume share of more

than 39%. Besides beer, the other alcoholic drinks categories remained highly fragmented in

2011. This was due to the existence and arrival of numerous products and brands, ownership of

which is split between a group of strong multinational players and some regular local

companies. As a result the market saw more competition year on year.

Home-drinking Trend Supports Dominance of Off-trade Channel

In 2011 off-trade sales of alcoholic drinks in Mexico accounted for nearly 80% of total volume

sales in the industry. This share has not varied significantly, yet it grew slightly over the review

period, supported by an emerging home-drinking trend. In the wake of the economic downturn

price-sensitive consumers remain wary of their budgets, and therefore resort with greater

frequency to drinking at home instead of going out, thereby avoiding unit price differentials of

over 300% in some cases. Moreover, the violence in Mexico at the time of writing is deterring

many people from going out on a regular basis, particularly in the north of the country. As a

result, Mexicans reaffirm their preference for purchasing alcoholic drinks via the off-trade

channel.



Brighter Perspectives in Coming Years

The outlook for the forecast period is optimistic. Overall, CAGRs of around 3% are expected

in both volume and constant value terms. The categories that will more dynamically contribute to

the overall growth of the alcoholic drinks environment are whiskies, still light grape wine and

spirit-based RTDs while greater interest in developing categories like artisanal domestic beer

and mezcal is expected.

KEY TRENDS AND DEVELOPMENTS

Beer Manufacturers Strive for Diversity

The offering of beers in Mexico has historically been constrained to brands produced and/or

distributed by duopolistic players, namely Grupo Modelo and Cervecería Cuauhtemoc

Moctezuma, a subsidiary of Fomento Económico Mexicano SA (FEMSA), which in late 2009

was acquired by global giant Heineken NV. For decades what Mexican consumers observed in

the flagship brands of each of these competitors are either pure refreshment of the image of

some products, or advertising campaigns aimed at repositioning them among target audiences.

Changes in beer formulas have barely been observed during the lifespan of such brands.

Actually, it is the genuine flavour of emblematic brands such as Corona Extra by Grupo Modelo

or Tecate by Heineken Mexico which has earned these brands a strong reputation and a large

base of loyal consumers.

A phenomenon that began in the late 1990s and which gained momentum over the last

decade is linked with the willingness of some Mexican consumers to experience alternative

drinks beside traditional choices. This trend is showing its first signs in the beer category, and is

gradually becoming more powerful. A handful of – mostly independent – small producers of beer

have ventured into the creation process of so-called craft beer in Mexico. This phenomenon can

be particularly observed in the northern part of the country, turning to large urban areas such as

Queretaro and Mexico City, and in the latter, particular neighbourhoods such as Roma or

Condesa – both well known for the latest developments in food and drink. The opening of bars

and restaurants with new styles ranging from funky to hipster to avant garde, has certainly

signified a new way of spending time and money outside the home among middle- and upper-

income consumers.

It is in such places, and in some bars and canteens throughout the country, where a greater

presence of artisanal beer is evident. Brands such as Cucapá by Cervecería de Baja California,

Tempus by Cervecería Primus, Minerva by Cervecería Minerva, Tijuana by Consorcio

Cervecero de Baja California or Zapata by Cervecería Revolución can be sometimes found in

these on-trade establishments. Nevertheless, one of the major hurdles craft beer manufacturers

face is to do with their relatively high unit prices. For instance, while standard beer is priced at

around Mx$84.50 (US$6.72) and Mx$107.00 (US$8.50) per litre in on-trade establishments,

artisanal beer can cost from Mx$169.00 (US$13.45) to Mx$197.20 (US$15.70) per litre.

Current impact

While craft beer manufacturers have successfully impacted a segment of middle- and upper-

income consumers by means of their novelty products and continuous efforts to promote them,

they have faced an even greater challenge in the Mexican market: free distribution.

Market distribution in Mexico operates under very peculiar rules. In recent decades duopolistic

players Grupo Modelo and former company Cervecería Cuauhtemoc Moctezuma (now

Heineken Mexico) seized the whole national territory and shared it indiscriminately by means of

deals with both off- and on-trade businesses. In the case of off-trade outlets, more precisely



among the independently owned small grocery stores, these „deals‟ typically take the form of

free refrigerators, signalling infrastructure, special discounts on products supplied by the

corresponding brewery group, and even in some cases cash incentives. In return for all such

offers these off-trade outlets deliver the exclusivity to sell either beer products from Grupo

Modelo or Heineken Mexico.

When this phenomenon is replicated throughout the country, the result is very solid market

concentration and a bullet-proof distribution strategy for each of these companies. However,

before this there is very little that craft beer producers can do to turn the situation to their own

favour.

The on-trade category works under somewhat similar rules, however the influence of this

duopoly is not so strong here. This is because many bars/restaurants remain reluctant to stick to

one company‟s brands for fear of losing customer preference.

Outlook

In the wake of greater pressures towards dissolving monopolistic practices in Mexico, and to

endow the Comisión Federal de Competencia – CFC (ie Federal Competition Commission) with

more powers to implement the law, in early 2011 a new law was approved in Congress. It is

worth noting that such anti-monopoly efforts have long precedents in Mexico, however no real

action was previously taken, either due to recurrent lobbying practices from those involved or

the inability of government authorities to prove the monopolistic nature of their activities. By the

time of writing there were no concrete measures regarding how this new law should work on the

industries of beer and soft drinks, and their respective „exclusivity‟-based modus operandi.

Nevertheless, it is likely that this network of contracts could gradually lose strength over the next

few years.

On their side, craft beer manufacturers are expected to continue joining efforts through

organised movements such as „Por la Cerveza Libre‟ (for the free beer) platform, over which

they promote the free choice of beer not only between consumers, but also between off- and on-

trade establishments. Por la Cerveza Libre currently counts with the participation of

manufacturers and selected on-trade establishments, and is very actively promoting

consumption of other types of beer in Mexico, besides the typical lager-style beer. As stated by

this organisation, of the 200 styles of beer available worldwide, only around five can be found in

Mexico. Craft brewers are launching interesting products that are inspired by exotic ingredients

such as chocolate, honey, citruses, nuts, parsley, etc. The aim of this movement is that by the

organising fairs and tasting events, Mexicans feel more encouraged to try other beer styles such

as brown ales, red ales, pale ales and stouts.

Currently, some producers have already ventured into the on-trade channel with the most

varied strategies. Mexicali beer is sold at Costco warehouse clubs and Superama supermarkets

(Wal-Mart de México) distributes Cerveza Minerva, Cerveza Querétaro and Tempus.

Companies such as Baja Brewing Company have found a good niche in Internet sales and

shipment to the US. Meanwhile Cucapá by Cervecería de Baja California has extensive retail

distribution in Southern California in the US, both through off- and on-trade channels.

On the other side, independent distributors such as La Belga, The Beer Depot and The Beer

Box are covering the off-trade channel with the most prominent brands of craft beer in Mexico

by means of ensuring their presence in specialised stores, and also through Internet retailing. A

breakthrough in the industry of craft beer has been made by Controladora Comercial Mexicana,

a conglomerate of off- and on-trade business units. Through its extensive Comercial Mexicana

network of supermarkets/hypermarkets „The Beer Factory‟ artisanal beer was launched in a

retail format to be sold off-trade, supported by the good reputation the restaurant-bar (also

owned by CCM) has built upon the preparation of flavoured beer. Strategies such as this could



set a strong precedent and eventually leave the door open for other craft brewers to enter into

off-trade distribution in a more organised way.

Future impact

Should artisanal producers of beer want to reach real market penetration, they should focus

more of their efforts on the off-trade channel. Over the forecast period, many distribution topics

will be defined and, provided Mexican authorities stand firm on their initial plans to fight

monopolistic practices, craft beer could gain more reputation and consolidation. The new

antitrust law proposed by the Mexican authorities is expected to exert greater pressure on

economic players across many industries through strategies such as greater fines for law-

breakers, criminal sanctions, and the possibility of unannounced inspection visits to verify the

absence of monopolistic practices.

The likely reaction of Grupo Modelo and Heineken Mexico to these measures will consist of

the further launch of new products across different segments to increase availability of more

options for consumers, thereby encouraging a more competitive environment, as in the case of

premium beer in recent years. However, it is not expected that the competitive scenario will

change significantly over the forecast period, as small competitors have neither the financial nor

productive infrastructure to compete against such giants, notwithstanding how effective new

antitrust laws potentially become.

At the end of the chain, consumers will gradually feel increasingly empowered to demand

more options in the market. Part of this attitude will be driven by curiosity regarding new

products, and some other part will be supported by an effective willingness to consume

alternative beer products on a more frequent basis.

Packaging Trends Revive Interest in Alcoholic Drinks

The way in which alcoholic drinks are found packaged on retail shelves has always played a

key role in the decision process of consumers. In some cases, knowledgeable consumers will

pay more attention to the quality, flavour and reputation of a product than to how it is packaged.

Some strong brads across the alcoholic drinks industry, such as Jose Cuervo Tradicional by

Casa Cuervo in tequila, Corona Extra by Grupo Modelo in beer or Johnnie Walker by Diageo

Mexico in Scotch whisky, have not made significant changes to their packaging over time.

Instead they stick to their traditional bottle designs and emblematic logos to ensure their solid

identity with consumers.

However, when buying alcoholic drinks, a still large proportion of consumers base their

decisions on the packaging as the only parameter under which they can judge and compare

products. It is in this respect that manufacturers of alcoholic drinks invest considerable

resources.

The type of packaging depends also on the category in which a particular player competes.

For instance, manufacturers of cognac, brandy and liqueurs will likely stick to classical bottle

designs, with a refined appearance and a logo that conveys its long tradition, in order to

consistently attract their base of knowledgeable consumers. Manufacturers of tequila/mezcal

have undergone strong efforts to create unique – and almost extravagant – shapes in their

bottles, such as premium brand Esperanto. This product is offered in a doughnut-shaped glass

bottle with a glass-made coloured „maguey‟ (a local plant from which tequila is made), which

makes it eye-catching. Corralejo tequila is clearly distinguishable from similar products thanks to

its typical blue colour, either in a long or round glass bottle.

Manufacturers of vodka have resorted to the choice of clean and minimalistic designs in their

bottles, using combinations of materials such as glass and metal. One of the leading

competitors, namely Absolut Vodka by Casa Pedro Domecq, has innovated with colour motifs



on packaging along with the launch of new flavour variants, such as citron (bright yellow), pear

(green), mandarin (orange), raspberry (red bottle) or mango (yellow).

Manufacturers of beer and wine have stuck to more conventional designs over time, with

minor variations. Yet, in the case of beer the proliferation of different formats and sizes plays a

key role in the positioning of a particular product, which has typically resulted in a mix of glass

bottles for small and „caguama‟ (ie popular term in Mexico for 1-litre beer bottle) sizes, together

with metal cans for more practical consumers. In the case of wine, bottle shape has not varied

significantly, yet manufacturers seek a label design that stands out from the crowd.

Current impact

Before the fierce competition alcoholic drinks face, complementary strategies to those like

attractive packaging have been implemented by manufacturers. This is the case of so-called

„special edition‟ products, which are marketed as exclusive offers available for only a certain

period, thereby appealing to those who have a particular taste for collections or unusual offers.

Throughout 2010 and even during the first part of 2011, the tequila/mezcal niche remained

very active in terms of „special edition‟ products. With the reason of the celebration of the

„Bicentenario‟ (the 200th anniversary of Mexican independence) and the „Centenario‟ (the 100th

anniversary of the Mexican revolution), some companies decided to venture into launching their

own commemorative editions of tequila in order to profit from this historic event, as consumers

were particularly eager to celebrate their Mexican identity.

To round out the importance special editions can achieve at a particular time, it is worth

mentioning the participation of high-level players in this phenomenon. During the celebration of

the Bicentenario and Centenario, the Mexican Government commissioned the elaboration of a

„special edition‟ tequila, and asked many tequila producers to participate. Different companies

answered the invitation, and 14 were chosen. They blended their products, leading to Tequila

Dos Siglos. The blending tequilas are Arette, Cazadores, Centinela, Don Julio, Don Roberto,

Gran Orendain, Herencia de Plata, Herradura, José Cuervo, Maestro Tequilero, Pueblo Viejo,

Reserva de los González, Tesoro de Don Felipe, Tezón and Tres Generaciones. This tequila

was created as a non-profit product, with all revenue from sales used to help Guadalajara‟s poor

communities.

The strategy of special editions is implemented by manufacturers in order to provide value

added to their products and give an extra incentive to consumers. Champagne manufacturers

use such strategies on a regular basis, such as Veuve Clicquot by Ferrer y Asociados. It is

common to see that these products come in nicely crafted cases, with a very chic retro design in

accordance with the image of the brands, and that can also be used to carry a couple of

champagne glasses, which makes it an ideal kit for those who planning a romantic event.

In addition, with the entrance of Heineken SV as the second most solid player in the Mexican

market in late 2009, packaging changes were observed in the beer category through its

eponymous brand. Heineken beer, which competes in the premium segment, launched two new

packaging designs in 2011. One consists of a so-called K-2 bottle with a more stylised shape

that makes it look more masculine and modern.

The other packaging design implemented by Heineken is the „tinta táctil‟ (touch ink) metal

can. This packaging consists of a series of small physical reliefs along the can that allow

consumers to identify a Heineken beer by touch alone, and also grant the can a refreshing

image. Without doubt these developments will exert pressure on other premium beer brands

over the forecast period, and the beer category in general, which will try to attract more

consumers through novelty packaging.



Outlook

As manufacturers have observed a positive response to products that boast a nice packaging

or some value added through some special edition or elegant in-the-purchase-of gifts, it is very

likely that they will continue to focus much of their strategies on this topic during the near future.

The relationship with packaging suppliers will certainly gain more importance in terms of

providing timely and adequate solutions to the rapidly-changing environment. Large packaging

suppliers such as Vitro will be more prepared to provide this kind of service to top competitors

such as Brown-Forman, with which it already has a long-term relationship, so that this

competitor can stay ahead within its most important categories in alcoholic drinks.

In addition, it is foreseeable that manufacturers will continue to promote alliances with

renowned artists to launch special packaging designed by them. Successful examples of this

trend are José Cuervo Reserva de la Familia‟s 2010 alliance with Mexican artist Pablo Vargas

Lugo to launch a series of beautifully painted wooden boxes, used as elegant cases for José

Cuervo bottles, and which can then be used for multiple purposes.

Future impact

The path for creativity regarding product packaging is set to provide a fertile ground for

manufacturers in terms of product differentiation. Over the next few years it is likely that

manufacturers will increase their alliances with artists and designers to launch more special

editions to attract consumers. Moreover, the proliferation of products that include gifts in the

form of smaller product presentations or glasses with printed brand logotypes, are also likely to

perform well over the forecast period.

In the future there is also expected to be more attempts to reach a greater audience, and to

provide an inclusive social image, such as that implemented by some wine makers such as

Enate from Spain, which has Braille inscriptions on the surface of its bottles for blind consumers.

Every time more brands will be recognised and judged by their packaging, which has been truly

identified as the one feature that represents brand values and image. Therefore packaging

needs to establish solid yet dynamic communication with consumers.

National Insecurity Promotes Home Drinking

The environment of violence in Mexico has seized the country at unimaginable levels. Local

wars between drug cartels have resulted into daily fatalities that have Mexican citizens on the

edge of social crisis. Public opinion is overwhelmingly against the policies implemented by the

administration of president Felipe Calderón, since no real defeat has prevailed upon drug

cartels.

With this scenario in mind Mexicans have gradually changed their perception of going out with

friends. This phenomenon does not seem to have yet had a major impact on the central and

south-eastern regions of the country. Large urban areas such as Mexico City still enjoy an active

nightlife and the continuous emergence of new bars and restaurants in fashionable

neighbourhoods such as Polanco, Condesa, Roma, Santa Fe and Del Valle. In Northern Mexico

the situation is different, however, with attacks such as that which occurred in a casino in

Monterrey city in late August 2011. As a result of these activities Mexicans living in these areas

prefer to stay at home rather than risking going out.

Current impact

Before this wave of violence, some Mexicans had to redefine their own way to socialise and

have fun. Home-drinking trends are set to re-emerge and act in favour of off-trade sales of

alcoholic drinks. In fact 2011 was the first year of the review period in which off-trade volume

sales of alcoholic drinks grew, roughly in line with on-trade volume sales at around 5% each.



It is not only crime statistics that are having a positive impact on the home drinking

phenomenon, however. Global gourmet trends are gaining momentum in Mexico, supported by

the steady expansion of the middle-income segment or aspirational consumers who wish to

increase their knowledge of wine culture and other types of drinks. In this respect, organising a

nice dinner with friends or family at home, paired with some good wine, has become

fashionable.

Another factor that may be acting in favour of off-trade sales is the aftermath of the economic

crisis. In the wake of the latter, many consumers became more budget-conscious and aware of

the convenience of home drinking versus consumption in on-trade establishments. The

difference in the average unit price between off-trade outlets and on-trade establishments

ranges from 222% in the case of beer to 425% in the case of RTDs/high-strength premixes. One

reason why on-trade prices are considerably higher than those in the off-trade channel is linked

to the reluctance of some establishments to sell full bottles, but only show per-glass prices on

their menus, significantly increasing profit margins and thus the price paid by consumers.

Unsurprisingly, categories such as RTDs/high-strength premixes continuously demonstrated a

healthy and dynamic performance over the review period, with CAGRs averaging around 4%

and 7% in volume and current value terms. Coincidentally, the RTDs/high-strength premixes

category has the highest proportion of total volume sales accounted for by off-trade, at 93% in

2011.

Outlook

Players in the alcoholic drinks industry seem to realise this trend in favour of home drinking

and are implementing design strategies accordingly in order to profit from it. Educational actions

aimed at increasing the knowledge of consumers regarding viticulture and preparation of drinks

and cocktails, together with its correct pairing with food, are taking place on a more frequent

basis in Mexico.

Popular newspapers such as Reforma – a national publication – typically include a gourmet

section with useful reviews of wine and other alcoholic drinks. Also, online publications such as

Vinisfera, provide readers with information to increase their knowledge of the latest wine trends

and everything related to such a lifestyle. In coordination with many suppliers, Vinisfera

publishers organise „cenas maridaje‟ (ie pairing dinners) in upscale restaurants. This online

magazine also offers links to specialised blogs, wine rankings, recipes, reviews, etc.

Educational strategies have even been implemented in the off-trade channel to catch

consumers. Popular specialised retail chain La Europea, which counts on a very wide

assortment of wines and alcoholic drinks in general, offers the service of highly qualified

sommeliers who continuously help customers in their decision-making processes. All this is

expected to turn into a culture of knowledgeable consumers who demand more quality for their

money, but who at the same time are willing to spend a greater proportion of their income on a

more frequent basis to indulge in their favourite alcoholic drinks.

Future impact

In the short-term, at least during the current presidential term, it is not expected that the

security environment will change favourably. In this respect, it is predictable that over the next

couple of years consumers will keep on demonstrating a preference for home drinking.

However, as presidential elections take place in 2012, it is also expected that next president

might embrace a quite different approach to that implemented by the current president, Felipe

Calderón, with respect to combatting drugs, stemming from the large unpopularity ratings from

the latter.

It is anticipated that the violence will settle down at the beginning of next presidential term and

towards the end of the forecast period. This, together with the emergence of fashionable bars



and restaurants that create a special environment outside the home are expected to underpin

the attention of consumers and thus give an additional boost to on-trade sales of alcoholic

drinks. Overall, on-trade volume sales of alcoholic drinks are predicted to see a CAGR of slightly

over 3%, while off-trade volume sales are expected to see a CAGR of just under 3% over the

forecast period.

Players Continue To Invest in Advertising Campaigns

The involvement between brands and consumers has reached new levels of communication

in recent years, with the former striving to build a tighter bond with the latter through a variety of

advertising and interaction strategies. Music has emerged as a natural way to establish and

strengthen that link, which explains the increasing number of concerts and festivals sponsored

by alcoholic drinks brands. Furthermore, this practice results in very accurate consumer

segmentation, with each type of product being promoted to its target audience. Furthermore,

when combined with online mechanisms to spread news of concerts mixed with advertising of

alcoholic drinks, it has become quite a powerful tool for manufacturers to circumvent restrictions

that prevent mass media advertising before 22:00hrs.

Notwithstanding tough restrictions imposed on TV advertising, major names in the alcoholic

drinks industry continue to invest heavily to position their products with catchy advertising

campaigns, which are in many cases tied to or supported by their online presence. Such

advertising focuses strongly on the young audience, which is claimed to be quite more

responsive to Internet-based advertising campaigns. Brands such as Torres 10 or Johnnie

Walker are very frequently advertised during TV programmes such as Miembros al Aire

(Members On Air).

Another notable campaign that revolutionised the way target consumers are observed is the

adaptation of the Chivalry campaign by Chivas Regal in Mexico, which depicts young

consumers with a very stylish and sophisticated attitude, a concept that contrasts with that of

whiskey competitor J&B that portrays consumers as a young crowd that mainly wants to party.

On the other side, Bacardi continues to position itself as the brand with the longest tradition,

while preserving its focus on youth concepts. Other brands such as Capitan Morgan in rum

concentrate more on promoting the organisation of parties through social networking site

Facebook. Every brand is making an effort to stand out from competitors and to a greater or

lesser degree making use of online tools to support the advertising efforts they conduct on TV.

Current impact

Due to the strength of their parent companies, it is very common for national beer brand

owners to sign contracts with local singers and rock bands to become the main sponsors of their

concerts and tours. One successful example of this was the series of concerts by Mexican

celebrity Alejandro Fernandez, starting his 2009 tour sponsored by the Victoria beer brand

(Grupo Modelo). Below-the-line activities were organised so Victoria consumers had the

opportunity to win „meet and greet‟ events with this popular singer during his tour.

According to industry sources, it was calculated that these below-the-line actions, with Victoria

beer associated with Alejandro Fernandez, had a clear impact on the more than 100,000 people

who attended his concerts. Following this success, Grupo Modelo started the „Victoria

Bicentenario‟ strategy for this brand, with the celebration of the 200th Anniversary of Mexican

independence during the 2010 „Feria del Caballo Texcoco‟ (Texcoco horse fair). Below-the-line

activities in this fair included sales of Victoria beer around Alejandro Fernandez‟s palenques

(local term for ranch-style concerts), capturing almost all beer sales during four full days the

whole event.



Some other brands that have chosen music as a strategic channel to reach more consumers

are Bacardi rum, which sponsored the Black Eyed Peas band during its 2010 E.N.D. World

Tour. Both Black Eyed Peas and Bacardi rum are popular among urban young people.

However, as manufacturers gain more knowledge of different ways to conduct advertising

campaigns, they also face the dilemma of how to allocate their advertising budgets in order to

cause the greatest possible impact. The resurgence of brands such as Indio beer by Heineken

Mexico has had a lot to do with effective positioning strategies, together with the accurate

redefinition of the product image in order to increase appeal to the target consumers.

With its now popular slogan „la cosa es buscarle‟ (the thing is to look for it), Indio beer has

been repositioned among an audience of young urban consumers who are constantly seeking

alternative music, thinking and lifestyles, together with a strong emphasis on the promotion of

culture in Mexico. In order to meet this goal, Indio was the official sponsor of the Vive Latino

music festival in Mexico City in early 2011 – the largest in Latin America with the participation of

over 90 bands from all over the world, and more than 150,000 attendants. For this festival,

Heineken Mexico implemented technologies such as the WiFi-Facebook Experience, providing

Internet access all over the festival enclosure and supplying electronic bracelets to those

attendants who had previously signed up to become part of the Indio community on Facebook.

These bracelets enabled their holders to click the „I Like‟ application button, which would later be

published through their own Facebook profiles, turning it into one of the most sophisticated

social media strategies.

Another online campaign was from Caribe Cooler and Jonnie Walker. The former went

through a brand refurbishing process by means of its „Nelson yo soy‟ (I am Nelson) campaign.

This online campaign features Nelson as the main character, a socially inept nerd who only

knows about videogames. Through a series of interactive videos, consumers were able to offer

advice to Nelson in order to become popular with attractive girls. A sound campaign of Internet

banners that could be watched by msn users resulted in over 131,000 clicks to access the

whole Nelson content, and more than 1.6 million of YouTube visits to watch Nelson‟s video.

With this strategy, Caribe Cooler is steadily attaining its repositioning goal.

In an effort to establish a closer link with Mexican consumers, and as one of the many

campaigns implemented by alcoholic drinks manufacturers during the celebration of the

Bicentenario, leading whisky brand Johnnie Walker by Diageo Mexico launched a video clip with

historic images showing how Mexicans have built their country over the last 200 years. This was

matched with its classic „Keep Walking‟ man to evoke feelings of hope and brand loyalty.

Following this tactical advertising pattern, Johnnie Walker launched a new campaign by mid-

2011 under the „Tres palabras, dos hombres, un whisky‟ (three words, two men, one whisky)

name. The purpose of this campaign, displayed on billboards and which has received important

feedback via Twitter, is to provoke emotions around the father-son relationship. Moreover,

below-the-line actions such as the presence of the brand in restaurants in Mexico City, where

consumers of Johnnie Walker bottles can write three words to describe their own relationship

and have a portrait in return, have reinforced the image of the brand in Mexico.

A similar global campaign emphasising the value of smiling and being kind regardless of

negative circumstances in life, namely „Live with Chivalry‟ for the Chivas Regal whisky brand, is

working towards capturing affluent and aspirational consumers who are mostly attracted by

elegant and sophisticated advertising.

Each brand is using a mix of different advertising strategies in order to reach a greater portion

of their target consumers. These actions are certainly working in favour of greater product

segmentation across the alcoholic drinks industry. In a more refined environment, Buchanan‟s

Red Seal whisky brand launched the “Uno + Uno: 32 líderes sumando por México” (one + one:

32 leaders summing up for Mexico) campaign. This is a book with the compilation of 32

important Mexicans who have shaped the story of the country in the areas of arts, sport, music



and fashion, among others. This list of talented Mexicans includes famous names such as golf

player Lorena Ochoa, actor Diego Luna and pop singer Paulina Rubio. With such actions

Diageo Mexico aims to increase exposure of the Buchanan‟s brand among affluent consumers

with more sophisticated tastes.

Outlook

In the near future companies are anticipated to act quite responsively to the actions of

competitors in terms of marketing. As young consumers have demonstrated a very positive

response to Internet-based strategies implemented by major players, it is expected that such

phenomenon will start to be replicated throughout the industry, creating greater opportunities for

every player in terms of brand exposure.

Segmentation practices are also expected to define the type of strategies conducted. For

more refined products consumed by an older population segment, interactive online campaigns

and promotions are unlikely to take hold. Instead manufacturers will stick to traditional

advertising methods, resorting to the creativity of arguments, ideas and images.

With the increasing number of smartphones in the market and the rising penetration of the

Internet in Mexico, the landscape for advertising of alcoholic drinks might change drastically

over the forecast period. This could be particularly true for young consumers who are typically

more in touch with online advertising. Through the use of tablets and applications that are tied to

frequent online advertising, users could help demolish regulation impositions which forbid

advertising of alcoholic drinks before 22:00hrs. This will be a strategy by means of which

manufacturers will be able to circumvent strict regulations. Use of social networks such as

Facebook and Twitter will also provide a very useful tool for manufacturers to spread the content

of their advertising campaigns.

Future impact

Over the forecast period it is anticipated that many types of advertising campaign will coexist

and even mix. Manufacturers now possess useful information to measure the impact of their

advertising tools and thus direct it in favour of conquering a greater audience. For those brands

that want to reach a younger audience, the immediate challenge is to create online campaigns

that are attractive and different enough to provoke greater interactivity from consumers.

The project launched by leading beer player Grupo Modelo with its Corona Extra brand still

seems quite promising in this respect. Together with Sony Music, it launched a music-sharing

platform called „sigue tu musica‟ (follow your music). This enabled Internet users to exchange

codes in product bottle caps for downloadable songs. This project faces competition from

alternative and already more popular music download programmes on the Internet. The extent

to which this project succeeds will relate to content updates, together with communication

targeting consumers.

For those brands whose prime objective is to reach the masses, TV advertising will keep

playing a key role. Heineken Mexico‟s brand Tecate has a long tradition and is strongly

positioned among sports aficionados, for instance. This is clearly reflected in its TV spots, which

feature characters who wish to spend time with friends, drinking, playing games or watching

sports. This series of videos has enjoyed a good response among consumers. For such

campaigns it is foreseeable that no major formula changes will be observed, and advertising will

very much follow the same guidelines throughout the forecast period.

New Rules of the Game May Alter Market Dynamics

As the economic recovery weakens in 2011 due to the slow response from the US economy,

on which the Mexican economy is still quite dependent, consumption figures are not necessarily

rebounding to pre-crisis levels in most categories. Moreover, some relevant sources of income



for the country, such as remittances from the US, are going through some contraction. The new

estimates for real GDP growth sit around 4.6% in 2011, below the 5.5% level observed in 2010.

As the economy contracted during the recession and the Mexican Government sought to

counter these effects, a boost in public spending increased Mexico‟s budget deficit, which by

2010 represented 44.2% of GDP. Due to the limited stance the government has to manipulate

tax revenue, special categories are always burdened with extra tax loads. In Mexico, the so-

called IEPS (Impuesto Especial sobre Produccion y Servicios – special tax on production and

services) has historically been used to complete the missing taxes of goods and services that

are hard or controversial to tax, such as food and medicines.

A revenue adjustment through the IEPS scheme was planned for the 2009-2014 period,

having an immediate impact on the alcoholic drinks industry. In the case of beer, IEPS is set to

jump from 25% in 2009 to 26.5% in 2010, then go down to only 26% by 2013 and end up at

25% again in 2014. For other alcoholic drinks (wine, spirits, cider/perry and RTDs/high-strength

premixes), the applicable IEPS is set to rise from 50% in 2009 to 53% in 2010, stay there until

2013, by which time it will go down to 52% to then reach 50% levels by 2014.

Current impact

Despite the slow optimism observed in other categories across the Mexican economy, the

alcoholic drinks industry seemed to see a good year in 2011, with total volume sales growing at

slightly over 5% and total current value sales increasing by roughly 9%. These growth figures

had not been observed since 2007 in the industry, and might correspond to the reactivation of

the category, together with the emergence of burgeoning categories that are still away from

maturity. Such categories include whiskies, still light grape wine and spirit-based RTDs/high-

strength premixes, which grew by 9%, 7% and 6% in volume terms respectively in 2011.

One fact that has helped the rapid reactivation of the alcoholic drinks industry is inevitably tied

to its high degree of concentration, with giant manufacturers or solid global brands accounting

for almost all volume traded in Mexico. These players count with a solid financial position that

allows them to pay for new product development launches and implement extensive advertising

campaigns even during recession. In consequence, this creates protection against economic

slumps and prepares the budget of consumers to reach active spending once the recovery

takes place.

However, new taxes have started to impact manufacturers across different categories of

alcoholic drinks, since they cannot absorb all the impact indefinitely. In 2011 unit prices of most

alcoholic drinks continued to adjust to new tax levels. As a consequence the average unit price

of the industry as a whole registered an increase of close to 4% in current terms in 2011, down

from the 7% increase in unit prices experienced during 2010. The average unit price of alcoholic

drinks in Mexico sits at Mx$52.50 per litre in 2011.

Outlook

In coming years it is expected that unit prices of alcoholic drinks will see greater stability as

consumers adjust to the new levels. Typically, these increases will be very much in line with

general inflation rates, which will not cause a drastic impression of consumers. Moreover, as

competitors in alcoholic drinks typically count on a solid financial position, investments that can

guarantee further cost-efficient production could also be more frequently observed. Examples

include the manufacturing plant opened by Grupo Modelo in Navas, Coahuila, where Corona

Extra beer is produced with a very high degree of automation, considerably increasing profit

margins for the company.

Regarding safety issues, the law is expected to become more defined and enforced over the

forecast period, although not in the early years. On-trade establishments are expected to see

the greatest impact of all these measures. However, this may not have such a severe impact on



alcoholic drinks manufacturers since some consumers will switch to drinking more at home

since off-trade prices are lower. In coming years it is anticipated that on-trade establishments

will join efforts through the chambers and association to fight the potential damages to this

already vulnerable category that has not yet recovered from the downturn it suffered during the

AH1N1 outbreak and economic slump in 2009.

Future impact

Further laws regarding the safety on on-trade establishments are likely to have an impact in

the industry. Recent legal initiatives such as the law requiring on-trade establishments to grant

two hours of free parking to clients are likely to face numerous hurdles before actually being

approved.

The cost structure of bars and restaurants, in most of the cases, does not allow for such

concessions, and they will fight to reverse such initiatives. Similarly, laws that pose banning

sales of alcoholic drinks in those on-trade establishments whose total surface area is less than

70 square meters are likely to face considerable trouble.

A likely scenario is a shift from on-trade consumption towards off-trade sales of alcoholic

drinks. Although this may not have remarkable consequences in terms of volume growth, the

story could be slightly different in value terms due to the price differential between the two

channels.

Key New Product Launches

As in other years over the review period, most new product developments were concentrated

in the spirits category, which has witnessed dynamic innovation in terms of authenticity/heritage

across tequila (and mezcal), whiskies and vodka during in 2011. In the case of tequila (and

mezcal), innovation focused on launches of special editions and high-end products rather than

the development of mass products. For example, Maestro Tequilero launched a unique extra

aged tequila named Atelier in late 2010, in a limited edition of only 1,000 hand-painted bottles,

which sold out immediately. Also in late 2010, Tequila Don Julio saw its image and advertising

campaign renovated to target younger consumers.

The Mexican Government ordered the elaboration of a commemorative tequila to celebrate

the bicentenary of Mexico‟s independence from Spain. 14 tequila makers participating in this

project produced the Dos Siglos (two centuries) tequila. By mid-2011 Casa Xalisco launched the

first 21-year aged tequila in an effort to compete directly with fine brandy and cognac products.

The innovating efforts for whiskies remained largely concentrated on other blended Scotch

whisky during the 2010-2011 period, due to the high dynamism demonstrated by this category

throughout the review period. By mid-2010 Diageo Mexico launched Buchanan‟s Master in the

country, a new blended 15-year Scotch. It also introduced Blackburn whisky in Mexico with

supporting advertising campaigns in order to increase recognition of the brand. Early in 2011,

Casa Pedro Domecq brought the 18-year Chivas Regal special edition, packaged in an

exclusive mirror box limited to only 3,000 units, distributed worldwide including Mexico.

In vodka, Casa Pedro Domecq and Casa Cuervo launched new products in 2011. The former

company introduced Absolut Elyx, an extension of the popular vodka brand – a product claimed

to be crafted from hand-selected estate wheat and which uses Absolut‟s copper rectification

stills in a small batch process, providing subtle fruit and floral notes. The latter company

introduced Three Olives vodka in a 1.5-litre presentation, targeting night clubs and bars through

discounters and warehouse clubs.

As well as these three main categories attracting the bulk of NPDs in alcoholic drinks in

Mexico, the rest included isolated launches across other categories such as artisanal beer,

spirit-based RTDs, cognac, rum and liqueurs.



Current impact

Unsurprisingly, many of the NPDs observed over 2010-2011 were in other blended Scotch

whisky. In 2011, other blended Scotch whisky grew by over 9% and 13% in volume and current

value terms respectively, becoming the fastest-growing niche within the whole alcoholic drinks

industry. Brands that already have a participation in the category of whiskies, such as

Buchanan‟s or Chivas Regal, look forward to strengthening their positioning by means of brand

extensions or limited editions. This is a very dynamic category that is enjoying the burgeoning

preference of Mexican consumers, resulting in the desire of companies to get on this particular

bandwagon.

In contrast with what is observed in whiskies, the force behind new product developments in

tequila (and mezcal) is explained by a desire among some manufacturers to move towards the

high-end of demand. In recent years the tequila (and mezcal) category as a whole has suffered

from either sluggish and even negative performance. This was despite the outstanding

individual performance of mezcal products, which are insufficient to compensate for the

underperformance of tequila brands.

Consumers in Mexico are shifting from traditional products such as tequila to more

fashionable whiskies and vodka. Overall, volume sales of tequila (and mezcal) saw a negative

CAGR of almost 1% over the review period. To counteract this trend tequila manufacturers

increased the offer of more sophisticated and special edition products – a phenomenon

reflected in the new product developments see over 2010-2011 period. These caused unit

prices to increase 5% in 2010 and 2011, right after the unit price declines observed in 2008 and

2009.

When it comes to vodka, new product developments observed in 2010-2011 may not have a

direct impact on the pace of growth. This is linked to the category cycle that is approaching

maturity in Mexico. Vodka became fashionable before whiskies, and therefore achieved

momentum years ago. Now, vodka brands continue to benefit from previous advertising and

positioning efforts, which led to a loyal base of regular consumers. However, current growth

rates are far from the levels seen five to 10 years ago. Volume sales of vodka in Mexico grew by

2% in 2011, below the 3% review period CAGR. This is indicative of the decelerating pace of the

category.

Outlook

Over the forecast period a response from competitors to recent new product developments

might be observed. One of the categories that may see greater activity in the short term is spirit-

based RTDs, where Jack Daniel‟s made a first move in 2009, mixing its popular whiskey with

cola and ginger ale flavours. In the first half of 2011 new spirit-based RTDs were launched in the

Mexican market. The first of these was Finlandia Frost by Casa Pedro Domecq, a vodka-based

RTD in two flavour variants: lemon and cranberry. The second was Smirnoff Ice by Diageo

Mexico, also a vodka-based RTD supported by the popularity of the Smirnoff brand. Such

developments are expected to be replicated over the forecast period, not only in vodka, but also

in whisk(e)y, tequila and wine. The reason why companies should want to expand their current

portfolios towards RTDs/high-strength premixes is to cover a wider segment of consumers,

those who wish to economise and drink at home.

In beer, which witnessed the emergence of a greater number of craft brands over the review

period, it is also likely that this trend will continue over the forecast period. Players will aim to

capitalise on the growing base of knowledgeable and high-income consumers who wish to be

more exposed to global trends and more exotic beer choices. This trend could be further

strengthened over the forecast period, with the second-largest beer company, Heineken Mexico,

reinforcing its place in the premium segment through repositioning its Heineken premium lager.



Undoubtedly, beer manufacturers see the premium segment as a way to compete more directly

with manufacturers of spirits.

As the effects of the 2009 economic crisis wane and consumers regain confidence in their

purchasing power and expenditure patterns, the appearance of special edition products, mostly

in spirits categories such as whiskies, cognac, tequila and brandy, is likely to occur. High-end

consumers will be particularly attracted to this trend as they are increasingly following the history

of their preferred brands through the collection of limited edition items.

Future impact

New product development activity will remain a way to reinforce brand positioning to

consumers. Either through new flavours, brand extension, novelty packaging and special

editions, existing brands of alcoholic drinks are expected to preserve and even increase sales in

the future. Launches of new product developments are a way to keep a brand fresh and up to

date with current trends. This is the case with flavoured vodka, in which manufacturers

remained in tune with regular consumption habits and developed products accordingly.

Unsurprisingly, the emergence of premium brands and limited edition products will have a

positive effect on unit price growth across certain categories within alcoholic drinks. Spirits is

one example of this trend, with unit prices anticipated to see a 3% constant value CAGR over

the forecast period compared with 1% over the review period. RTDs/high-strength premixes will

also register higher increases of unit prices in constant terms over the forecast period with a 3%

CAGR versus the historic 2% CAGR.

Overall, volume sales of alcoholic drinks are predicted to see a 3% CAGR over the forecast

period, greater than the historic 2% CAGR. Beer and spirits are also expected to see greater

growth in volume terms over the forecast years. At least some of this positive future

performance may stem from steady new product development activity in these categories.

Summary 1 Key New Product Developments 2010-2011

Absolut Elyx (Casa Pedro Domecq SA de CV)

Vodka Authenticity/heritage/ small batch offerings: higher end redefined. Absolut presents its most recent product: Absolut Elyx. Crafted from hand-selected estate wheat, using Absolut‟s copper rectification stills in a small batch process

2011

Amarula (Casa Cuervo SA de CV)

Cream-based liqueurs

Casa Cuervo gets Amarula‟s Liqueur distribution in Mexico. Coming from South Africa, Amarula is available in more than 100 countries and will potentially reinvigorate the cream-based liqueurs segment in Mexico

2011

Bols (Casa Cuervo SA de CV)

Liqueurs Niche audiences: female and younger drinkers. Casa Cuervo starts distributing Bols in

2011



Mexico. Remaining faithful to its original recipes, Bols‟ reputation is for providing consistently high quality products. Bols has 43 different flavours

Casa Xalisco (Casa Xalisco SA de CV)

Tequila (and mezcal) The blending tequilas are: Arette, Cazadores, Centinela, Don Julio, Don Roberto, Gran Orendain, Herencia de Plata, Herradura, José Cuervo, Maestro Tequilero, Pueblo Viejo, Reserva de los González, Tesoro de Don Felipe, Tezón and Tres Generaciones

2011

Chivas Regal 18 yrs Mirror Box Limited Edition (Casa Pedro Domecq SA de CV)

Other blended Scotch whisky

Premiumisation: Chivas Regal 18 years arrives in Mexico with its exclusive mirror box limited edition. There will only be 3,000 boxes around the world and Mexico will be one of the countries selling this edition

2011

Diosa Blanca (Cervecería Minerva SA de CV)

Domestic premium lager

Craft offerings and the microbrewery revolution. Cervecería Minerva launches its new beer Dios Blanca. This recipe includes wheat, oats, coriander seeds and aniseed as well as orange peel

2011

Finlandia Frost (Casa Pedro Domecq SA de CV)

Spirit-based RTDs Targeting younger and female audiences, RTD Finlandia Frost has two different flavours: lemon and cranberry. It is the new super-premium RTD from Finlandia. It comes on 275ml glass bottles with 5% alcohol graduation

2011



Kraken Rum (Casa Cuervo SA de CV)

Dark rum Authenticity/heritage/small batch offerings: higher end redefined. Casa Cuervo launches Kraken Rum. During the first year it will only be sold in Monterrey and is expected to sell 5,000 cases. Kraken Rum is a 94% proof black spiced rum from Trinidad

2011

Smirnoff Ice (Diageo México SA de CV)

Spirit-based RTDs Targeting younger and female audiences. Diageo is presenting Smirnoff Ice in Comercial Mexicana. This product was introduced previously in Mexico without success, but this is the first time that Diageo actually offers it

2011

Sol Clamato (Cervecería Cuauhtemoc Moctezuma SA de CV)

Beer Niche audiences: Female and younger drinkers . Heineken and Peñafiel group worked together on the launch of Sol Clamato. This beer-based RTD is meant for people who are not fond of beer, seeking to attract new clients

2011

Three Olives (Casa Cuervo SA de CV)

Vodka Economising: Three Olives vodka presents its new size 1.5-litre bottle. This bottle targets discount stores, nightclubs and bars

2011

Adelita (Cervecería Revolución SA de CV)


Craft offerings and the microbrewery revolution. Cervecería Revolución launches Adelita beer as part of its collection. Product is made in Guadalajara and can be found in Mexico City, Guadalajara, Monterrey as well as the USA, Spain,

2010



Germany and France

Atelier (Maestro Tequilero SA de CV)

Tequila (and mezcal) Authenticity/heritage/small batch offerings: higher end redefined. Maestro Tequilero launches a unique aged and extra aged tequila blend called Atelier. This is a collection of 1,000 bottles hand-painted by Oaxaca‟s artists with ocean inspiration

2010

Blackburn (Diageo de México SA de CV)


Whisky Blackburn was launched in Guadalajara in July 2010. Diageo decided to sell Blackburn only in that area for a year before going nationwide. Past March it began using TV advertising to increase product awareness

2010

Buchanan‟s Master (Diageo México SA de CV)


Premiumisation: Diageo launched Buchanan‟s Master, a new blended 15-year Scotch. The product is distributed on- and off-trade and in Mexico City and Monterrey, hoping to grow next year throughout the rest of the country and Latin America

2010

Don Julio (Becle SA de CV)

Tequila (and mezcal) Premiumisation/packaging: Tequila Don Julio changes it traditional bottle, refreshing its appearance and aiming for a younger consumer base

2010

Dos Siglos (Gobierno de la República Mexicana)

Tequila (and mezcal) Mexico‟s Government asks for a special tequila to celebrate the bicentenary of Mexico‟s independence. 14 companies are chosen to blend their products, producing Tequila Dos Siglos

2010



Hennessy Privilege Limited Edition (Moet Hennessy Polska)

Cognac Authenticity/heritage/small batch offerings: higher end redefined. Moet Hennessy created a limited edition run of its Hennessy Privilege Line in support of the Mexican bicentennial. The 60,000 boxes were hand numbered

2010

Jimador (Casa Herradura SA de CV)

Tequila (and mezcal) Packaging/premiumisation: Tequila Jimador changes its bottles to let consumers know they changed their formula to 100% blue agave

2010

Villa (Cervecería Revolución SA de CV)


Craft offerings and the microbrewery revolution. Cervecería Revolución launches Villa beer as part of its collection. Product is made in Guadalajara and can be found in Mexico City, Guadalajara, Monterrey as well as the USA, Spain, Germany and France

2010

Zapata (Cervecería Revolución SA de CV)


Craft offerings and the microbrewery revolution. Celebrating the 100th anniversary of the revolution, Cervecería Revolución makes 120,000 bottles of Zapata beer – a brown ale with 5% alcohol

2010

Source: Euromonitor International

Specialist Retailer

Specialist retailers are categorised within the food/drink/tobacco specialists channel. The

participation of this channel within off-trade sales of alcoholic drinks was 32% and 31% in

volume and current value terms, respectively in 2011. Major chains such as La Divina, La

Europea or Bodegas Alianza are included in the food/drink/tobacco specialists channel,

however, small independently owned businesses comprise the bulk of outlets in this channel.

The assortment of alcoholic drinks is much wider in food/drink/tobacco specialists than in

mainstream retailers and they are typically located in middle and high-income neighbourhoods.



A key differentiator of specialist retailers against mainstream outlets is that the former counts

with the presence of qualified staff members that are able to give customers advice regarding

alcoholic drinks, food pairing, and the quantity of product needed for social events, etc.

Current impact

Food/drink/tobacco specialists was the leading off-trade distribution channel for spirits and

beer, accounting for 52% and 32% of total volume sales within these categories, respectively in

2011. It was also the second most important channel for wine, accounting for 29% of off-trade

volume sales, only after supermarkets, and second also for off-trade volume sales of

cider/perry, accounting for 21% in 2011, only after discounters. In terms of off-trade volume

sales of RTDs/high-strength premixes, this channel ranked fifth with a participation of less than

10% in 2011.

The off-trade volume share of food/drink/tobacco specialists in wine declined over the review

period, mostly due to stronger competition from supermarkets/hypermarkets and discounters.

Moreover, the emergence of wine clubs and Internet retailers placed even greater pressure on

food/drink/tobacco specialists. However, towards the end of the review period, the share of

food/drink/tobacco specialists in off-trade volume sales of wine is rising slowly again as

knowledgeable consumers traded up to higher quality imported wine brands, which cannot be

typically found in mainstream retailers. Moreover, the advice provided by qualified staff

members, such as sommeliers in specialist retailers, grants continuous incentives to those

consumers eager to learn more of wine culture. A similar case is evident in spirits, where the

share of food/drink/tobacco specialists within off-trade volume sales of spirits declined until

2007; from 2008 this channel has regained some momentum due to the continuous promotions

implemented by large chains such as La Divina, La Europea and Bodegas Alianza, as well as

the steady expansion in the number of outlets of these retailing chains.

The key strength of the food/drink/tobacco specialists channel lies on its ability to supply

premium and super-premium wine and spirits brands – a niche that targets high-income and

knowledgeable consumers. This competitive advantage vanishes, in turn, when it comes to

standard and economy brands of wine and spirits, together with other types of alcoholic drinks

such as beer, cider/perry and RTDs/high-strength premixes. Inexpensive brands of spirits,

mostly domestic, are commonly distributed through supermarkets/hypermarkets and vinaterías

– a popular concept in Mexico that consists of small independently owned retail outlets that

carry a limited selection of alcoholic drinks and snacks. The share of food/drink/tobacco

specialist in off-trade volume sales of beer remained quite stable over the review period, with a

slight increase. However, other channels such as discounters, convenience stores, forecourt

retailers, other grocery retailers and Internet retailing saw a consistent expansion over the same

period, and may eventually represent a competitive threat to the further expansion of

food/drink/tobacco specialists in off-trade beer volume sales.

Outlook

Volume sales of alcoholic drinks are anticipated to show positive signs of growth over the

forecast period, which means imminent opportunities for food/drink/tobacco specialists, but also

increasing competition from large supermarket/hypermarket chains and discounters, which will

maintain their expansion plans in coming years. Competition will be most intense in beer, wine

and spirits, where a wide variety of standard brands are steadily threatening the positioning of

food/drink/tobacco specialists, which are stronger in the segment of premium products.

Specialist retailers will also face greater competition from convenience stores, forecourt retailers

and other grocery retailers as the expansion in the number of such outlets is imminent in the

short-term. The competitive advantage of specialist retailers in the niche of premium and super-



premium products will prevail over the forecast period due to the wide array of imported, high-

end and difficult-to-find brands in these outlets.

Chained specialist retailers, such as La Divina and Bodegas Alianza, are much better

prepared to cope with increasing competition stemming from other retail channels than

independent specialist outlets over the forecast period. Their size, number of outlets and wider

assortment of high-quality products gives them more negotiation power with suppliers, which

they can in turn trade for promotional discounts to loyal consumers on a regular basis.

Future impact

Independent operators will represent the largest group within the total outlet numbers in the

food/drink/tobacco specialists channel over the forecast period, due to the proliferation and

prevalence of the vinatería concept throughout Mexico, particularly in middle- and low-income

neighbourhoods. The expansion in the number of outlets of top players such as La Divina,

Bodegas Alianza and La Europea is likely to contribute to the expansion of shares of off-trade

alcoholic drinks volume and constant value sales held by chained food/drink/tobacco specialist

retailers over the forecast period. A greater willingness among Mexican consumers to buy

premium spirits and wine products will also bring more dynamism to this channel in coming

years.

Summary 2 Leading Specialist Retailers 2011

Retailer Outlets

La Europea SA de CV

40

La Divina SA de CV 204

Bodegas Alianza SA de CV

48

Vinoteca de México SA de CV

19

La Castellana SA de CV

11

Independents 11,800

Source: Company research

Market Merger and Acquisition Activity

Relevant merger and acquisition activity within brands of alcoholic drinks sold in Mexico took

place at global level. Merger and acquisition moves in the local scene did not have a significant

impact on the structure of the market as most producers, except for the tequila (and mezcal)

category, are multinationals. The most important action was observed in beer in late 2009, when

Heineken NV acquired Cervecería Cuauhtemoc Moctezuma SA de CV, the beer business unit

of FEMSA (Fomento Economico Mexicano SA de CV), which also became part of Heineken as

a result of this major operation. As this acquisition took place at global level, the already existing

subsidiary of Heineken NV, namely Heineken México S de RL de CV, assumed total

responsibility for most brands previously owned by Cervecería Cuauhtemoc Moctezuma in

Mexico.

No notable merger and acquisition activity was observed at local level in Mexico towards the

end of the review period due to the strength multinational companies already enjoy in the

Mexican alcoholic drinks market. Domestic producers of tequila (and mezcal) remain the most



desirable category for possible mergers and acquisitions. However, very few of these

competitors are considered world-class players worthy of a major merger and acquisition

operation. The last one for such an operation took place in 2007, when global giant Brown-

Forman acquired local player Casa Herradura, famous for its emblematic El Jimador tequila

brand.

Current impact

As the main recent merger and acquisition operation took place in beer, 2011 was a year in

which the actions of Heineken Mexico started to have some impact on the whole category. With

more solid establishment in the country, one of the main objectives of the company is to

strengthen the segment of premium beer in Mexico through the stronger presence of its flagship

Heineken brand. Currently, the immediate competitors for Heineken in imported premium lager

in Mexico include Budweiser by Grupo Modelo and Miller Genuine Draft by Miller Trading Co.

Concrete actions, such as the transformation of Heineken packaging to make it look more

sophisticated are being conducted in order to compete more directly with Grupo Modelo.

Moreover, Heineken Mexico already started local production operations of Heineken beer in

Orizaba, Veracruz. With the boom certain categories of spirits such as whiskies, vodka and

mezcal are experiencing in Mexico, the counter-strategy implemented by Heineken is to

reinforce its premium beer positioning.

Outlook

No merger and acquisition activity is expected over the forecast period at local level. The

strongest local companies are born from a family tradition in tequila or wine, yet they still lack an

attractive size and sufficient infrastructure to become worthy of acquisition by a larger player.

Moreover, local producers of tequila, wine and beer in most of the cases adhere strictly to their

own traditional production methods, some of which remain artisanal. This makes it difficult for

large external players to tie such products with their own methods of production.

Some years from now, Grupo Modelo has explored the niche of premium lager with limited

success. A real competitor was missing for the whole market dynamics to work and attract

consumers trading up from standard to premium beer. Currently Grupo Modelo competes with

Budweiser and Carlsberg imported beer in the premium segment. A stronger presence from

Heineken Mexico with its Heineken beer is expected to be observed over the forecast period.

These players are anticipated to gradually expand the scope for premium lager in Mexico.

However, not only will premium beer feel the impact of the recent Heineken NV‟s acquisition: the

other beer brands across different segments will be subject to a greater degree of competition

by means of new product development activity, eye-catching advertising campaigns and more

aggressive distribution, etc.

In early 2011 rumours regarding the eventual acquisition of the Jose Cuervo tequila brand by

Diageo Plc were evident in the industry. Diageo Plc has been revealed as the most likely

candidate to pursue such acquisition derived from its solid brand portfolio and the distribution

rights it possesses in the country. Trade sources estimate that around 30% of worldwide value

sales of tequila correspond to the popular Jose Cuervo brand, being an absolute leader in the

US tequila category. Diageo Plc currently distributes Jose Cuervo tequila worldwide, and it

therefore makes sense that the company may keep pushing for an attractive offer in the mid-

term, even if this does not occur immediately. The possible acquisition of Jose Cuervo by

Diageo Plc would complete the set of international players that produce and distribute major

tequila brands, such as Herradura and El Jimador by Brown-Forman, Patron tequila by Bacardi

and Sauza by Fortune Brands



Future impact

Since there is no speculation regarding potential mergers/acquisitions of local players over

the forecast period, this is not a factor that can be considered to have a significant impact on the

performance of alcoholic drinks in coming years.

Over the long term a likely scenario in terms of merger and acquisition activity could emerge

within beer. As new artisanal brands arise and create their own niches in the Mexican market,

they could gradually build a more solid base of consumers, which could eventually be of greater

interest to top players such as Grupo Modelo or Heineken Mexico.

Competitive producers of artisanal beer, such as Cervecería Minerva, have demonstrated the

potential of this niche in the Mexican market. However, limited financial and marketing

infrastructure has prevented them from achieving greater business dimensions. One likely

scenario could be the acquisition of some of these artisanal beer brands by either one of the

beer giants. A second scenario is related to a possible alliance between small producers of craft

beer to attain greater empowerment and strengthen their own productive platforms.

MARKET BACKGROUND

Legislation

Legal purchasing age and legal drinking age

The legal age at which alcoholic drinks can be purchased and consumed in Mexico is 18.

Despite the law, it is common for youngsters in Mexico to have their first drink before they

reach the age of 18. Moreover, under-age drinking is widespread in the country. Minors

acquire alcoholic drinks by using fake ID cards, bribing store clerks or getting adults of legal

drinking age to make purchases for them. Alternatively, minors can simply visit retail outlets

where they know that they are unlikely to be asked for ID, as this particular law is poorly

enforced in Mexico.

Towards the end of the review period the government announced plans to enforce the law on

under-age drinking more effectively. As of 2011, however, under-age drinking remained a

common problem.

Drink driving

Driving under the influence of alcohol is prohibited in Mexico. Under the law, any drunk driver

who causes an injury or fatality can face up to seven years‟ imprisonment. Enforcement of this

law varies from state to state. In 2005 local governments in several states established a

breathalyser programme known as „Alcoholimetro‟. Under this programme police set up

checkpoints on roads where drink-driving is more common (for example, in areas where there

are many bars and nightclubs). Police officers at these checkpoints visually assess drivers,

and if there is suspicion of intoxication drivers are asked to take a breathalyser test. A

breathalyser reading of 0.4 or higher (equivalent to 0.08 Blood Alcohol Content) will result in

temporary imprisonment of 24 to 72 hours, with no chance of bail. Penalties can be more

severe depending on the level of alcohol in the blood.

Motor vehicle accidents represent the leading cause of death for people aged 15 to 40 in

Mexico. Approximately 50% of these accidents are caused by drink-driving. The local

government of Mexico City was among the first to implement the Alcoholimetro breathalyser

programme. According to Mexico City‟s Secretariat of Public Safety, motor accidents related

to alcohol consumption in the local jurisdiction have decreased by 60% since the programme



was adopted in 2005. This success has been very influential in encouraging other local

governments across the country to implement the Alcoholimetro programme.

Advertising

Mexico has a number of legal guidelines on the advertising of alcoholic drinks. Companies

that fail to comply with the relevant legislation can incur heavy penalties, and may even be

permanently banned from advertising their products in the country. The mandatory strapline

for all alcoholic drinks‟ advertisements is „Evite el exceso‟ (avoid excess). Advertisements

may also feature the phrases „Beba con moderación‟ (drink in moderation) or „Nada con

exceso, todo con medida‟ (have everything moderately).

Advertisements cannot graphically depict consumers drinking alcohol; they can depict the

product, or show people serving it into a glass or cup, but never people tasting or sipping

drinks. Furthermore, companies are not allowed to link alcohol with cigarettes, cars or sexual

activity in advertising. Every actor and/or model appearing in any type of alcohol-related

advertisement must be at least 18 years old, and clearly portrayed as an adult.

TV and radio advertisements for spirits, wine and RTDs can only be broadcast after 22.00hrs.

Beer products are exempt from this regulation, and may be advertised during special events

such as football matches at any time of day. According to the government this is because

beer products have a lower alcohol content than other types of alcoholic drinks.

Sponsorship remains a very important advertising tool for alcoholic drinks players in Mexico.

Large companies sponsor football teams, baseball teams, motor racing events, concerts,

nightclub promotions, etc. Leading sponsors include Heineken México, previously Cervecería

Cuauhtemoc Moctezuma SA de CV, Grupo Modelo, Diageo México SA de CV, Casa Pedro

Domecq Mexico and Casa Cuervo.

Advertising alcoholic drinks via the Internet became increasingly common in Mexico over the

review period. Not only is Internet advertising relatively cheap, but it also affords greater

flexibility and freedom to companies, and online campaigns can be more closely tailored to

appeal to specific target audiences. Moreover, there are no practical regulations regarding the

time of the day alcoholic drinks can be advertised online. Unlike international rules that do not

allow the entry of minors into the websites of companies producing alcoholic drinks, in Mexico

this is not a legal requirement. Some local producers of wine and spirits, such as Monte Xanic

SA de CV, Valle Redondo SA de CV and Vinicola LA Cetto SA de CV, do not demand that

online visitors type or select their birth dates from drop-down menus, which is something that

has become standard worldwide.

Smoking ban

On 1 April 2008 a ban on smoking in all enclosed public areas including on-trade

establishments came into force in Mexico City. In August of the same year, the smoking ban

was implemented nationally. The ban was initially met with strong opposition, and even faced

a number of legal challenges. It has gradually come to be widely accepted by consumers and

on-trade operators alike, however. Many restaurants, bars, clubs and other on-trade

establishments have created open-air designated smoking areas. As a result, the smoking

ban has not had a noticeably negative impact on on-trade alcoholic drinks consumption.

Opening hours

In Mexico it is the prerogative of individual states to regulate where and when alcoholic drinks

can be sold. Accordingly, opening hours for establishments selling alcoholic drinks vary from

state to state. Generally speaking, convenience stores in large cities are open 24 hours a day

and can sell alcoholic drinks without restriction. However, in some states and municipalities it



is illegal for convenience stores and other retailers to sell alcoholic drinks after midnight.

Opening hours for independent small grocers and independent food/drink/tobacco specialists

vary depending on their locations and practices, but very few operate on a 24-hour basis.

Large grocery retailers and chained specialists outlets, meanwhile, are typically open from

07.00hrs to 23.00hrs.

Regulations for on-trade outlets depend not only on the type of establishment in question (eg

restaurants, bars, pubs, nightclubs), but also on their location. In Mexico City, for example, the

law regulating on-trade businesses (Ley de Establecimientos Mercantiles) states that on-trade

outlets must stop serving alcoholic drinks at 02:00hrs. This law also states that restaurants

may only serve alcoholic drinks between 12.00hrs and 24.00hrs. In coastal areas, restaurants

and bars may have extended opening hours at night, due to the fact that higher temperatures

tend to limit the consumption of alcoholic drinks (with the exception of beer) during the day.

During special national holidays or events, the sale of alcoholic drinks is prohibited across

Mexico under a regulation known as Ley Seca (Dry Law). Most notably, this ban is enforced

the night before and on the day of state and national elections, although it also applies on

certain national holidays.

On-trade establishments

Widespread public concern and government containment efforts during the AH1N1 (swine flu)

outbreak in April and May 2009 resulted in the closure of many businesses in Mexico,

including on-trade outlets selling alcoholic drinks. Bars and restaurants in major urban centres

such as Mexico City were particularly badly affected. In 2009, the outbreak effect which was

surrounded by the severe economic recession resulted in a -10% constant growth of the

consumer foodservice industry in Mexico. Furthermore, bars and pubs fell 3% the same year.

Over the 2005-2009 period as a whole, however, the total number of on-trade outlets in

Mexico increased by 3,081. This was partly attributable to the expansion of major chains and

the increasing number of franchises operating in the country. During the early years of the

review period economic growth also bolstered on-trade outlet numbers, with rising disposable

incomes enabling consumers to spend more on eating and drinking outside the home.

Somewhat paradoxically, towards the end of the review period the economic downturn also

helped to sustain growth in on-trade outlet numbers, with some Mexicans opening

independent restaurants (many of which also sell alcohol) as a means of supporting

themselves and their families after losing their jobs. However, the net openings of on-trade

outlets was likely negative due to the crisis.

As a slow economic recovery took place over the 2010-2011 period, the resurgence of the on-

trade channel became imminent, particularly in Central Mexico and, more specifically, large

cities such as Mexico City where fashionable neighbourhoods such as Condesa, Roma or

Santa Fe continue to witness the opening of bars and restaurants to provide Mexicans with

more recreational spaces outside the home. The trend is particularly opposite in Northern

Mexico, however, where violence arising from drug cartel wars keeps the population in a

permanent state of alert, with the consequent closure of many on-trade establishments.

Table 1 Number of On-trade Establishments by Type 2006-2011

Subcategory 2006 2007 2008 2009 2010 2011 100% home delivery/ 2,676 2,770 2,879 2,884 2,915 2,981 takeaway Bars/pubs 24,931 25,457 26,346 26,635 27,007 27,655 Cafés



Full-service restaurants 176,472 179,720 183,109 174,235 175,186 177,744 Fast food 32,370 33,468 34,534 34,741 36,154 37,521 Self-service cafeterias Street stalls/kiosks 330,560 356,006 360,171 353,569 353,338 359,504

Source: Trade interviews, Euromonitor International

TAXATION AND DUTY LEVIES Alcoholic drinks are heavily taxed in Mexico. Moreover, retailers and on-trade operators

selling alcoholic drinks must comply with specific licensing laws. For example, an on-trade

license to sell spirits is more difficult to obtain than an on-trade license to sell beer. This is

particularly true for on-trade operators that serve beer with food, and reflects the fact that beer

has a lower alcohol content than most spirits. On-trade alcoholic drinks licenses are also

subject to geographical restrictions. For example, on-trade outlets selling alcoholic drinks

must be in commercial locations, but cannot be situated within a certain distance of schools,

places of worship and government buildings.

Tariffs are imposed on foreign alcoholic drinks products imported into Mexico. Tariffs vary

depending on the country of origin, as Mexico has trade agreements with the US and several

Latin American and European countries. A 2006 ruling on foreign trade states that all

manufacturers, exporters and importers in Mexico must certify the alcohol content of the

products they trade.

As alcohol consumption is considered quite stable and resistant to changes in price, also

socially undesirable, and as the Mexican Government faced the prospect of lower revenue

due to the contraction of the economy from 2009 onwards, VAT on alcohol was increased by

1% and a lump sum tax on sale was added to the duties derived from selling alcohol. Since

2010 alcohol sales have been subject to 16% value added tax (VAT). In addition, these

products are also subject to two additional duties: an excise tax known as Impuesto Especial

a la Producción y Servicios or IEPS (Special Tax on Production and Services), and a lump

sum tax of Mx$3 per litre of alcohol, regardless of alcohol content. The excise tax does apply

according to the alcohol content, with high alcohol content translating into a high excise tax.

According to Chapter 1, Article 2 of the law defining IEPS, alcoholic drinks are taxed as

follows:

Alcoholic beverages with no more than 14% abv per litre: 25%;

Alcoholic beverages with 14-20% abv per litre: 30%;

Alcoholic beverages with more than 20% abv per litre: 50%.

Table 2 Taxation and Duty Levies on Alcoholic Drinks 2011

Beer/Wine/ Wine Spirits Liquors Excise tax (% per bottle) 25 30 50 (less than (14-20 abv) (over 20 abv) 14 abv) Import tax n/a n/a n/a Sales tax 16 16 16 Environmental tax 1.75 0.0 0.0

Source: Secretaría de Hacienda, Secretaría de Salud



Table 3 Typical Wholesaler and Retailer Off-trade Mark-ups by Selected Categories 2011

Beer C/p RTDs Wine Wh BC Wholesaler 25 15 15 25 25 15 Retailer 15 20 25 25 20 17 WS Rum T L OS Wholesaler 15 15 20 20 20 Retailer 15 15 20 15 20

Source: Euromonitor International estimates Note: C/p=cider/perry; Wh=whisk(e)y; BC=brandy and cognac; RTDs = RTDs/high-strength premixes;

WS=white spirits; T=tequila (and mezcal); L=liqueurs; OS=other spirits

Table 4 Selling Margin of a Typical Beer Brand 2011

% retail value rsp 2011 VAT 31.0 Retailer 9.0 Distributor 12.0 Excise 14.4 Manufacturer 33.6 TOTAL 100.0

Source: Euromonitor International estimates, store checks Note: Based on Corona Extra 355ml for Mx$9.00, at discounters. Excise includes any other tax as relevant

Table 5 Selling Margin of a Typical Wine Brand 2011


Source: Euromonitor International estimates Note: Based on La Cetto750ml at supermarkets for Mx$91.00. Excise includes any other tax as relevant

Table 6 Selling Margin of a Typical Spirits Brand 2011


Source: Euromonitor International estimates Note: Based on Jimador 950ml at supermarkets for Mx$139.00. Excise includes any other tax as relevant



OPERATING ENVIRONMENT

Contraband/parallel Trade

Contraband and parallel trade represent a serious threat to legitimate manufacturers and

distributors in the Mexican alcoholic drinks market. Illegal distributors import alcoholic drinks

products from countries other than their places of origin to avoid paying taxes, and then sell

them for less than the usual retail price in Mexico. These practices are most evident in spirits,

where taxation is considerably higher than in other categories. According to industry

association Comisión para la Industria de Vinos y Licores (Industry Commission for Wines

and Liquors – CIVYL), an estimated 30% of alcoholic drinks sales value originated from illegal

sales in 2010, and as a result of the economic crisis and reduced purchasing power of

consumers, that percentage most probably increased. Contraband/parallel trade accounted

for approximately 30% of total alcoholic drinks current value sales in 2010. It is likely that this

percentage increased during the latter years of the review period due to the negative impact

of the economic downturn on consumer spending power. In 2011, data published by the

Asociacion Mexicana de Instituciones de Seguros AMIS (ie Mexican Association of Insurance

Companies) reported that the annual figures for theft of beer products increased by 365%,

while those for the rest of alcoholic drinks did so by 172%.

Counterfeit alcoholic drinks represent another major problem in Mexico, especially in

nightclubs that run open bar nights. Even though open bars are prohibited by Reglamento

sobre Venta y Consumo de Bebidas Alcohólicas (Regulation for the Sale and Consumption of

Alcoholic Drinks), several on-trade establishments offer open bars to patrons, who typically do

not question the quality or the origin of the alcoholic drinks being served. Open bars are also

a common feature of private parties, which can be attended by hundreds of people. Industry

sources argue that a wide portion of alcoholic drinks sold on-trade are altered by adding

ingredients, either to soften the drink, or to replace some of the original ingredients, as in the

case of methanol. This could pose a grave risk to public health. Counterfeit alcoholic drinks

are commonly served at bars. The problem is so widespread that industry sources estimate

around 40% of all alcoholic drinks sold in Mexico are counterfeit.

According to the Ministry of Health, tequila, rum, cognac and whisk(e)y are among the most

frequently counterfeited alcoholic drinks in Mexico. Counterfeit products are sold in tianguis,

large open street markets notorious for all kinds of criminal activity. The most famous of these

tianguis are found in Tepito and Santa Cruz. Counterfeit alcoholic drinks sold at such

locations usually cost less than half the price of legitimate products sold by licensed retail and

on-trade distributors.

According to industry sources, the states where most of the counterfeit alcohol drinks

products sold in Mexico are produced are Mexico City, Estado de México and Jalisco. The

number one location for the consumption of counterfeit products meanwhile is Cancún.

The Ministry of Public Security is constantly working to limit the trade in counterfeit alcoholic

drinks, seizing thousands of illegal products each year. Procuraduría Federal del Consumidor

or PROFECO (Consumer Protection Agency) meanwhile carries out regular inspections to

identify and shut down on- and off-trade establishments that sell counterfeit spirits. In the case

of tequila, the Consejo Regulador del Tequila or CRT (Council of Tequila Regulation) also

carries out inspections and continually lobbies the Mexican Congress to impose harsher

penalties on those that produce or sell counterfeit products. Together with the Mexican media,

government authorities also work to make the general public aware of the health risks posed



by counterfeit products, and inform consumers of practical ways to determine whether the

alcoholic drinks they buy are legitimate or fake. In addition, authorities seek to educate

consumers about simple steps they can take to limit the trade in counterfeit products, such as

destroying the bottles used to package legitimate brands after their contents have been

consumed.

Duty-free

Dufry México SA de CV is the firm that holds the government contract to manage duty-free

outlets in most major airports in Mexico since November 2009, operating 47 duty-free outlets

in the country. A significant proportion of international air travellers purchase alcoholic drinks

at these outlets, especially premium spirits and wine products, to avoid high local excise

taxes. Travellers can either purchase alcoholic drinks in duty-free outlets or else place an

order via the Internet and pick up their purchases on departure.

Cross-border/private Imports

People residing within 50km of the US border in the north of Mexico or the Guatemalan

border in the south are allowed to pay a discounted excise tax of 10%. It is likely that some

people exploit this tax break by smuggling alcoholic drinks into other parts of the country

where excise taxes are higher. While there are no official figures available on how widespread

this practice is, it is not believed to be significant.

MARKET INDICATORS

Table 7 Retail Consumer Expenditure on Alcoholic Drinks 2006-2011

Mx$ million 2006 2007 2008 2009 2010 2011 Total 119,012.3 127,099.6 138,396.0 140,761.3 151,067.8 157,972.1

Source: Euromonitor International from trade associations, trade press, company research, trade interviews, trade sources

Note: 2011 data is forecast

MARKET DATA

Table 8 Sales of Alcoholic Drinks by Category: Total Volume 2006-2011

Million litres 2006 2007 2008 2009 2010 2011 Beer 6,040.6 6,314.9 6,460.6 6,522.2 6,374.6 6,709.8 Cider/Perry 12.9 12.6 12.9 12.1 12.3 12.1 RTDs/High-Strength 115.8 121.6 128.7 130.1 135.8 141.0 Premixes Spirits 199.4 202.3 204.9 204.0 211.4 213.5 Wine 46.5 57.9 60.6 59.3 63.1 66.9 Alcoholic Drinks 6,415.2 6,709.4 6,867.7 6,927.6 6,797.1 7,143.3

Source: Euromonitor International from official statistics, trade associations, trade press, company research, store checks, trade interviews, trade sources



Table 9 Sales of Alcoholic Drinks by Category: Total Value 2006-2011

Mx$ million 2006 2007 2008 2009 2010 2011 Beer 158,806.5 190,490.3 219,738.3 231,986.2 240,959.6 265,020.8 Cider/Perry 609.6 591.2 605.9 599.0 634.8 647.1 RTDs/High-Strength 4,683.3 5,010.5 5,550.4 5,868.1 6,176.6 6,436.1 Premixes Spirits 64,607.1 69,248.5 72,606.8 73,016.1 79,536.5 84,783.0 Wine 9,513.6 12,047.7 13,947.5 14,222.3 16,006.8 17,652.7 Alcoholic Drinks 238,220.1 277,388.3 312,448.9 325,691.7 343,314.3 374,539.7


Table 10 Sales of Alcoholic Drinks by Category: % Total Volume Growth 2006-2011

% total volume growth 2010/11 2006-11 CAGR 2006/11 Total Beer 5.3 2.1 11.1 Cider/Perry -1.4 -1.2 -6.1 RTDs/High-Strength Premixes 3.9 4.0 21.7 Spirits 1.0 1.4 7.1 Wine 6.1 7.6 43.9 Alcoholic Drinks 5.1 2.2 11.3


Table 11 Sales of Alcoholic Drinks by Category: % Total Value Growth 2006-2011

% local currency, current value growth 2010/11 2006-11 CAGR 2006/11 Total Beer 10.0 10.8 66.9 Cider/Perry 1.9 1.2 6.2 RTDs/High-Strength Premixes 4.2 6.6 37.4 Spirits 6.6 5.6 31.2 Wine 10.3 13.2 85.6 Alcoholic Drinks 9.1 9.5 57.2


Table 12 Sales of Alcoholic Drinks by Category by On-trade vs Off-trade Split: Volume 2011

Off-trade On-trade TOTAL Beer (million litres) 5,314.5 1,395.3 6,709.8 Cider/Perry ('000 litres) 11,096.5 1,021.8 12,118.4 RTDs/High-Strength Premixes ('000 130,489.4 10,531.5 141,020.9 litres)



Spirits ('000 litres) 149,075.0 64,376.7 213,451.7 Wine (million litres) 43.2 23.8 66.9 Alcoholic Drinks (million litres) 5,648.4 1,494.9 7,143.3


Table 13 Sales of Alcoholic Drinks by Category by On-trade vs Off-trade Split: Value 2011

Mx$ million Off-trade On-trade TOTAL Beer 143,884.3 121,136.6 265,020.8 Cider/Perry 470.2 176.9 647.1 RTDs/High-Strength Premixes 4,518.6 1,917.5 6,436.1 Spirits 31,354.7 53,428.3 84,783.0 Wine 6,260.9 11,391.8 17,652.7 Alcoholic Drinks 186,488.7 188,051.1 374,539.7


Table 14 Sales of Alcoholic Drinks by Category by On-trade vs Off-trade Split: % Volume 2011

% volume analysis Off-trade On-trade Total Beer 79.2 20.8 100.0 Cider/Perry 91.6 8.4 100.0 RTDs/High-Strength Premixes 92.5 7.5 100.0 Spirits 69.8 30.2 100.0 Wine 64.5 35.5 100.0 Alcoholic Drinks 79.1 20.9 100.0


Table 15 Sales of Alcoholic Drinks by Category by On-trade vs Off-trade Split: % Value 2011

% value analysis Off-trade On-trade Total Beer 54.3 45.7 100.0 Cider/Perry 72.7 27.3 100.0 RTDs/High-Strength Premixes 70.2 29.8 100.0 Spirits 37.0 63.0 100.0 Wine 35.5 64.5 100.0 Alcoholic Drinks 49.8 50.2 100.0


Table 16 Company Shares of Alcoholic Drinks by Global Brand Owner 2007-2011



% total volume Company 2007 2008 2009 2010 2011 Modelo SA de CV, Grupo 51.5 51.8 52.6 53.1 52.7 Heineken NV 0.4 0.3 0.3 38.6 39.1 Pernod Ricard Groupe 1.1 1.1 1.1 1.2 1.2 Anheuser-Busch InBev NV - 1.1 1.0 1.0 0.9 Brown-Forman Corp 0.7 0.8 0.8 0.9 0.9 Grupo Cuervo SA de CV 0.4 0.4 0.4 0.4 0.4 Productos de Uva SA de CV 0.3 0.3 0.3 0.4 0.4 Bacardi & Co Ltd 0.4 0.4 0.4 0.4 0.4 Diageo Plc 0.2 0.2 0.2 0.3 0.3 SABMiller Plc 0.3 0.3 0.2 0.2 0.2 Others 44.7 43.3 42.6 3.6 3.5 Total 100.0 100.0 100.0 100.0 100.0


Table 17 Off-trade Sales of Alcoholic Drinks by Distribution Format: % Value Analysis 2006-2011

% off-trade 2006 2007 2008 2009 2010 2011 Store-Based Retailing 100.0 99.4 99.3 99.3 99.3 99.2 - Grocery Retailers 97.1 96.5 96.1 96.3 96.3 96.2 - - Discounters 4.6 4.9 5.2 5.9 6.0 6.1 - - Food/drink/tobacco 29.5 30.8 30.6 29.8 31.4 31.1 specialists - - Hypermarkets 9.4 8.9 9.1 9.4 8.8 9.0 - - Small Grocery 47.8 46.4 45.8 45.8 45.2 45.1 Retailers - - - Convenience Stores 18.7 19.3 20.0 20.1 20.1 20.3 - - - Forecourt Retailers 2.2 2.3 2.4 2.4 2.4 2.1 - - - Independent Small 26.9 24.9 23.4 23.3 22.7 22.8 Grocers - - Supermarkets 5.8 5.4 5.4 5.4 4.9 4.9 - - Other Grocery - - - - - - Retailers - Non-Grocery Retailers 2.9 2.9 3.2 3.0 3.0 3.0 Non-Store Retailing 0.0 0.6 0.7 0.7 0.7 0.8 - Direct Selling - - - - - - - Homeshopping - - - - - - - Internet Retailing 0.0 0.6 0.7 0.7 0.7 0.8 - Vending - - - - - - Total 100.0 100.0 100.0 100.0 100.0 100.0


Table 18 Off-trade Sales of Alcoholic Drinks by Category and Distribution Format: % Volume Analysis 2011

% off-trade B C/P RTDs/HSPs S W Store-Based Retailing 99.3 100.0 100.0 99.0 98.3 Grocery Retailers 96.3 99.0 99.0 93.2 96.9



Discounters 6.2 27.0 7.0 7.5 5.3 Food/drink/tobacco 32.2 21.0 9.5 52.0 28.8 specialists Hypermarkets 8.5 16.0 27.0 17.0 24.8 Small Grocery Retailers 45.0 20.5 41.0 8.0 2.0 Convenience Stores 20.0 2.0 26.5 4.5 2.0 Forecourt Retailers 2.0 0.0 0.0 0.0 0.0 Independent Small Grocers 23.0 18.5 14.5 3.5 0.0 Supermarkets 4.5 14.5 14.5 8.8 36.0 Other Grocery Retailers 0.0 0.0 0.0 0.0 0.0 Non-Grocery Retailers 3.0 1.0 1.0 5.8 1.4 Non-Store Retailing 0.7 0.0 0.0 1.0 1.8 Direct Selling 0.0 0.0 0.0 0.0 0.3 Homeshopping 0.0 0.0 0.0 0.0 0.0 Internet Retailing 0.7 0.0 0.0 1.0 1.5 Vending 0.0 0.0 0.0 0.0 0.0 Total 100.0 100.0 100.0 100.0 100.0


Key: B = beer; C/P = cider/perry; RTDs/HSPs = flavoured alcoholic beverages; S = spirits; W = wine

Table 19 Forecast Sales of Alcoholic Drinks by Category: Total Volume 2011-2016

Million litres 2011 2012 2013 2014 2015 2016 Beer 6,709.8 6,865.6 7,038.4 7,309.9 7,519.1 7,715.1 Cider/Perry 12.1 11.9 11.8 11.6 11.5 11.3 RTDs/High-Strength 141.0 146.2 151.8 157.3 162.9 168.2 Premixes Spirits 213.5 217.1 220.6 223.6 226.5 229.9 Wine 66.9 71.8 76.9 82.7 89.0 96.1 Alcoholic Drinks 7,143.3 7,312.6 7,499.6 7,785.0 8,009.0 8,220.6


Table 20 Forecast Sales of Alcoholic Drinks by Category: Total Value 2011-2016

Mx$ million 2011 2012 2013 2014 2015 2016 Beer 265,020.8 271,900.1 279,956.7 292,109.1 301,863.5 311,035.6 Cider/Perry 647.1 637.6 627.6 618.4 610.4 601.9 RTDs/High-Strength 6,436.1 6,618.9 6,814.6 7,008.5 7,207.0 7,395.8 Premixes Spirits 84,783.0 87,320.3 89,849.8 91,963.0 94,279.8 96,881.4 Wine 17,652.7 18,983.3 20,368.3 21,969.1 23,686.2 25,658.0 Alcoholic Drinks 374,539.7 385,460.3 397,617.0 413,668.1 427,646.9 441,572.6


Table 21 Forecast Sales of Alcoholic Drinks by Category: % Total Volume Growth 2011-2016

% total volume growth



2015/16 2011-16 CAGR 2011/16 Total Beer 2.6 2.8 15.0 Cider/Perry -1.3 -1.4 -6.6 RTDs/High-Strength Premixes 3.2 3.6 19.3 Spirits 1.5 1.5 7.7 Wine 8.0 7.5 43.6 Alcoholic Drinks 2.6 2.8 15.1


Table 22 Forecast Sales of Alcoholic Drinks by Category: % Total Value Growth 2011-2016

% local currency, constant value growth 2011-16 CAGR 2011/16 TOTAL Beer 3.3 17.4 Cider/Perry -1.4 -7.0 RTDs/High-Strength Premixes 2.8 14.9 Spirits 2.7 14.3 Wine 7.8 45.3 Alcoholic Drinks 3.3 17.9


DEFINITIONS Explanations of words and/or terminology used in this report are as follows:

Aguardiente – locally produced spirits with a high alcohol content made from fermented and

distilled sweet musts and vegetable macerations, or a combination of the two.

Tianguis – large open air bazaars or street markets offering a wide variety of goods and

services. They are commonly associated with the sale of pirated, stolen and counterfeit

goods, including counterfeit alcoholic drinks. One of the largest and most famous tianguis is in

Tepito, a populous low-income neighbourhood in downtown Mexico City. The Tepito tiangui

has effectively operated as a free-trade zone for decades, with a limited police presence and

authorities implicitly tolerating low-level criminal activities. such as the sale of pirated or

counterfeit goods.

Vinatería – a popular concept in Mexico, within the food/drink/tobacco specialist retailers, that

consists of small, independently owned retail outlets that carry a limited selection of alcoholic

drinks and food (snacks), typically located in middle and low-income neighbourhoods.

Mezcalería – a new concept within on-trade establishments, consisting of small spaces

located in fashionable neighbourhoods such as Condesa or Roma in Mexico City, that are

decorated according to true Mexican folklore, where people gather to enjoy a large selection

of mezcal products.

Pulque – a maguey-based spirit (maguey is a local fleshy-leafed plant of the agave family) of

milky consistency that was heavily consumed by Aztec ancestors.

Pulquería – an old concept within on-trade establishments, consisting of venues where

middle- and low-income families could enjoy refreshing pulque-based beverages. This

concept was largely overshadowed by the emergence of commercial beer brands during the



second half of the 20th century. Some young consumers are now struggling to revive the

tradition of these places.

Other terminology:

GBO refers to Global Brand Owner, which is the ultimate owner of a brand.

NBO refers to National Brand Owner, which is the company licensed to distribute a brand on

behalf of a GBO. The NBO may be a subsidiary of a GBO or it may be a completely separate

company. Share tables at both GBO and at NBO level are provided in the report. Reference

to shares in the report analysis is at NBO level.

Published Data Comparisons

National consumer expenditure

This is a valuable survey that is carried out within households in Mexico, its frequency is

quarterly and it reflects the actual amount of expenses in financial consumer goods and overall,

every monetary and non-monetary expenditure made by households in the period of reference.

Likewise, it displays all revenue received by a household. This information differs from

Euromonitor‟s due to methodology reasons, as INEGI carries out a survey of households

whereas Euromonitor International data is based on primary and secondary research

techniques, which use INEGI‟s and other information as input.

Encuesta Industrial Mensual (Monthly Industrial Survey – INEGI)

This is carried out on a monthly basis and it consists of volume and value sales information

provided by producers. This information accounts only for sales made by producers to

distributors and retailers and does not include mark-up, inventories, imports or exports.

Consejo Regulador del Tequila

The Tequila Regulating Council is in charge of certifying tequila in Mexico for national

consumption and exports. It hold trustworthy statistics on production, inventories and exports.

Our data differs, however, as the body does not track consumption

Sources used during research include the following:

Summary 3 Research Sources

Official Sources Agricultural Trade Ofice

Agriculture & Agri-Food Canada

American Chamber of Commerce of Mexico

Commision Federal de Competencia

Consejo Regulador del Tequila (CRT)

Federal District Government

INEGI

Instituto Nacional de Estadística (INE)

Instituto Nacional de Salud

Ministry of Economy

Organization for Economic Cooperation & Development

Procuraduría Federal del Consumidor (PROFECO)



Secretaria de Comercio y Fomento Industrial (SECOFI)

Secretaria de Economia

Secretaría de Hacienda & Credito Publico

Secretaría de Relaciones Exteriores

Servicio de Administración Tributaria

Spanish Embassy

Subsecretaria de Negociaciones Comerciales Internacionales

United States Trade Center

US & Foreign Comercial Service

US Agricultural Trade Office

US Chamber of Commerce

US Exports to Mexico

Trade Associations Academia Mexicana Del Vino AC

Asociación de Importadores y Representantes de Alimentos & Bebidas

Asociación de Sidreros

Asociación Latinoamericana de Fabricantes de Cerveza (ALAFACE)

Asociación Nacional de Fabricantes de Cerveza (ANFACER)

Asociación Nacional de Importadores & Exportadores de la Republica Mexicana

Asociacion Nacional de Tiendas de Autoservicio y Departamentales (ANTAD)

Asociación Nacional de Vitivinicultores AC

Bureau National Interprofessionel du Cognac (BNIC)

Cámara Nacional de Comercio de la Ciudad de México (CANACO)

Cámara Nacional de la Industria de la Transformación (CANACINTRA)

Cámara Nacional de la Industria Tequilera

Cámara Nacional de la Industria y Alimentos Condimentados (CANIRAC)

Cognac Council in France

Comercam

Comité Interprofessionnel du Vin de Champagne (CIVC)

Consejo Mexicano Vitivinícola

Consejo Regulador del Tequila

IVDP Portugal



National Association of Wine Growers

Office International de la Vigne et du Vin

Productores de Zacatlán

Scotch Whisky Association

SWA

Trade Press 100 Tequila

Advertising Age Mexico

Alto Nivel

America Economia

Beer.com

Beerhunter.com

Beerworldmonopoly.com

Beverage World

Catadores

CNN Expansion

Cosmos Online

Creativa Magazine

Diario Monitor

Drinks International

El Economista

El Financiero

El Norte

El Porvenir

El Semanario

El Sol de Puebla

El Universal

Empresas & Empresario

Expansión

Hispanic Vista Magazine

La Prensa

Marketing Up

Merca 2.0

Mural

New York Times

Noticias Vinos & Vitivinicultura

Notimex

Prensa Libre

Realbeer.com



Reforma

Revista Abarrotes & Mas

Revista ADCebra

Revista America Economia

Revista Busines Mexico

Revista Milenio

Revista Poder

Vinos & Bebidas

Wall Street Journal

Wine & Spirits International

World Drink Trends

World Trade Magazine

Source: Euromonitor International

alcoholic drinks in mexico

Documents

herencia de plata

casa pedro domecq

cervecera cuauhtemoc moctezuma

independent small grocers

selected estate wheat

lump sum tax

average unit price

trade outlet numbers