Anti-trust watchdog is a toothless lapdog
That’s how SABMiller interpreted the ruling by Mexico’s anti-monopoly agency on 12 July 2013, which basically upholds exclusivity contracts. SABMiller had lodged a complaint with the Mexican antitrust authority in 2010, alleging that the two big brewers – Modelo and FEMSA – lock up much of the market with exclusive contracts. Exclusivity contracts, either verbal or in writing, are where a customer agrees just to sell one brewer’s beer in exchange for financial commitments. Commenting on the resolution, SABMiller said that it did not go far enough to materially change conditions for access and really stoke competition.
But that was to be expected, wasn’t it? After all, this is not the first time SABMiller’s complaint was swept aside by the Mexican Federal Trade Commission (or CFC). Why should it prohibit exclusivity contracts now, which give the country’s duopolist brewers Modelo (AB-InBev) and FEMSA (Heineken) almost unfettered control over beer sales, when it did not do so in the past?
However, the CFC imposed a few changes to the current practice, after AB-InBev and Heineken agreed to limit their use of exclusivity contracts to 25 percent of points of sale, and to reduce that number to 20 percent by 2018.
SABMiller views the commitments made by AB-InBev and Heineken as limited by several significant exclusions, which make it possible to restrict access to retailers in important geographic regions. Given that some retailers are very large and many others very small, "it will be possible to restrict beer sales to a much greater extent than reflected in the exclusivity commitments, and therefore the existing anti-competitive situation will be allowed to persist," SABMiller said in a statement.
Media reported that Miguel Flores, the only antitrust commissioner to vote against the settlement, expressed similar concerns, saying that by allowing exclusivities to continue, the brewers can now cherry-pick their most important sales points, thus reducing space for competition in their top territories.
The Mexican beer market is the world’s fifth biggest by volume sales, according to Euromonitor. It is also a virtual duopoly, with Modelo brands like Corona claiming about 58 percent of the 67 million hl market, while Heineken’s brands like Tecate account for 41 percent.
Credit Suisse described the antitrust deal as "not that harsh" for the big brewers, while Nomura Securities analyst Ian Shackleton said it should have minimal impact on the two brewers’ profit pools in Mexico. Nomura estimates that Mexico accounts for 13 percent of Heineken’s EBIT and 10 percent of AB-InBev’s EBIT.
The CFC’s ruling affects mostly the small mom-and-pop convenience stores (circa 50 percent of industry sales), many of which agree to sell only one of the two brewers’ brands in exchange for beer-logo awnings, signs or refrigerators, as well as discounts on beer purchases, credit or assistance with local permits. It will not affect, says Nomura, the modern retail (estimated now at 20 percent of industry sales), convenience stores (15 percent) or the on-premise (15 percent).
The antitrust settlement also stipulates AB-InBev and Heineken shouldn’t block micro-brewers from bars and restaurants where the brewers have exclusive pouring rights, but SABMiller said importers like itself can still be shut out of those accounts.
SABMiller will determine its appropriate response in due course.
