Introduction
Group Modelo S.A de C.V (Modelo) established in 1922 within the Mexican brewing industry. In its operation, the firm’s initial brand was known as Modelo. After some time, the firm introduced another brand known as Corona Extra.
Over the years, Corona Extra managed to attain a significant market share. For example, the brand was ranked as the 4th best selling brands with regard to volume. In its Mexican domestic market, the firm was facing intense competition from other firms such as Heineken. During the 1930s, the firm experienced a challenge arising from the Great Depression.
However, the firm’s financial stability was restored by 1935 through an acquisition of Toluca Mexico Brewery. Additionally; there was a significant growth during this period within the Mexican brewing industry. This was characterized by an increment in the level of production and distribution.
In an effort to survive into the long term as a going concern entity, the firm’s management team came into a consensus to venture into the international market. Decision to incorporate the concept of internationalization was motivated by an increment in demand within the international market. In its initial internationalization phase, the firm decided to introduce Corona Beer into the international market starting with the US. This paper is aimed at evaluating the performance of Corona Beer in the international market.
Identification of issues
Competition within the market
For a considerable duration, the beer industry in Mexico was protected. This limited the intensity of competition from foreign firms. In an effort to stimulate economic growth, Mexico joined NAFTA by entering into a trade agreement. This meant that foreign firms could enter into the Mexican market. The resultant effect is that the local firms experienced an increment in the intensity of competition. For example, some of the firms which posed a threat to Group Model include the American and Canadian firms which ventured into the local market.
Market entry strategy
There are diverse strategies that a firm can use in entering the international market. Some of these strategies include use of agents, exporting and foreign direct investment. The case presents an illustration of the strategy used by Modelo Group in venturing the international market. In its effort to venture into the international market by introducing Corona Beer, the firm’s identified the US as its target market.
Modelo decided to use US agents to distribute Corona Beer in the US market. The firm contracted Amalgamated Distillery Products Incorporation as its agent. Group Modelo also entered into distribution contracts with other local firms which operated within the international market. This played a vital role in the firm’s internationalization efforts.
The quality of product determines the effectiveness with which it penetrates the international market. This is due to the fact that it contributes towards the product attaining an optimal market position. In venturing the American market, the firm also used Barton Beers Limited as its distributor. Use of foreign agents in the international market increases the effectiveness with which a firm enters the international market.
This arises from the fact that foreign agents are more conversant with international market. Barton Beers was more efficient in marketing premium beers within the US. The firm also contracted Gambrinus Incorporation as its distributor in the US. Group Modelo gave the distributors the right to undertake all marketing activities. This led into development of a strong relationship between Group Modelo and its distributors.
Marketing strategy
In its operation, Modelo was very efficient. For example, Corona Beer was packaged in a clear and unique bottle. This played a critical role in distinguishing Corona Beer from other competing products. Corona Beer experienced a significant growth especially in the southern states.
As a result of effective marketing, Corona Beer experienced a significant growth in the US especially during the period ranging between 1980 and 1988 due to increased importation f the beer. However, the growth in the size of market for Corona Beer slowed down as a result of increased exercise taxation by the government. Corona Beer’s market share declined with a margin of 15%.
In an effort to improve the situation, the firm absorbed the exercise tax rather than passing it over to the consumers through an increment in the price. The result was that the product’s growth trend was restored. Within a period of 12 years, Modelo became established within the US beer industry. The firm also introduced new products into the international market in addition to Corona Beer. Some of these products include Corona Light, Pacifico Clara, Modelo Especial and Negra Modelo. However, the firm ensured that its products were of high quality.
Group Modelo also adopted an effective marketing campaign to promote the brand. For example, the firm used the slogan ‘fun in the sun’ and ‘miles away from ordinary’ in its advertising campaigns. These slogans elicited a unique experience amongst the consumers upon consumption of the brand. Due to adoption of an effective marketing strategy, Group Modelo was able to increase its customer bas. For example, the firm attracted the non-beer-drinking population such as women to start consuming beer. Their preference was Corona Beer.
Acquisition of firms
The case illustrates the strategies used by firms within the industry in an effort to position themselves within the market. As a result of the intense competition within the industry, firms in the brewing industry increasingly considered the concept of acquisition. Acquisition is one of the strategies that firms can incorporate in an effort to increase its market share. Prior to venturing the international market, the firm was committed at establishing a strong market share within its domestic market.
Additionally, the firm was also committed at enhancing its financial stability after the adverse effects of the 1930 Great Depression. In order to achieve, this, the firm’s management team decided to incorporate the concept of acquisition. In 1935, the firm acquired a local firm known as the Toluca y Mexico Brewery. The acquisition contributed towards the firm increasing its production hence attaining a strong growth.
Consolidation strategy
Other firms also adopted the consolidation strategy. The resultant effect is that the industry became characterized with a small number of global players. For example, in March 2004 Belgium’s 3rd largest brewing firm merged with Brazil’s 5th largest firm. This led into emergence of the world’s largest brewing firm.
Analysis of issues
Effect of competition
One of Group Modelo’s core competitors is FEMSA. Currently, FEMSA holds the 2nd largest market share within the Mexican beer industry. FEMSA has established an effective distribution channel within Mexico compared to Group Modelo. FEMSA has managed to establish an efficient distribution channel by contracting Oxxo which has the most efficient distribution channel in North and Central America. For example, Oxxo has established a large network of convenient stores.
The increment in the intensity of competition within the Mexican beer industry posed a challenge to Group Modelo. This arises from the fact that increase in intensity of competition reduces the profitability of a particular market segment. Through establishment of an effective distribution, FEMSA acquired a significant proportion of Group Modelo’s market share in Mexico.
In an effort to compete with Group Modelo’s Corona Beer within the US market, FEMSA entered into an alliance with Heineken which is one of the most popular brands in the market. The objective of the alliance was to dethrone Corona Beer. However, the popularity of Group Modelo’s Corona Beer in the international market compared to FEMSA brands made the alliance to be unsuccessful.
Volatility of the Mexican economy
In addition, to the intense competition Group Modelo’s profitability potential was also threatened by the volatility within the Mexican economy. For example, the Mexican Peso underwent a significant devaluation in 1995.
This made exporting of Corona Beer into its international market more expensive. The resultant effect is that the firm experienced a significant reduction in its sales. Incorporation of the concept of internationalization made Group Modelo to be adversely affected by the devaluation of the Mexican Peso. On the other hand, FEMSA was not susceptible to the economic conditions as a result of currency devaluation. This is due to the fact that it concentrated on its Mexican market which meant that it was not required to exchange its profit for the local currency.
Financial analysis
During the period ranging between 2004 and 2005, Group Modelo experienced a significant growth in its financial performance. The firm experienced an increment in its sales. The increment in the foreign market was relatively high compared to the increment in the domestic market. For example, in the domestic market, the firm’s market increased with a margin of 4% while sales in the export market increased with a margin of 12.3%.
The total market increased with a margin of 6.4%. Group Modelo’s net sales increased from 46, 307 million dollars in 2004 to 49,551 million dollars in 2005. This represents a growth in sales with a margin of 7%. The firms’ gross profit also increased with a margin of 2.7% from 26,082 million dollars to 26,776 million dollars. Net income also grew with a margin of 14.1% during the same period from 6,389 million dollars to 7,291 million dollars.
Conclusion
The case illustrates how Group Modelo successfully ventured into the international brewing market. The effectiveness with which the firm managed to venture into the international market is evaluated by illustrating the strategies that the firm used. The strategies evaluated relate to market entry strategy and marketing strategies. Additionally, the case also illustrates the challenges that Group Modelo faced both in the domestic and the international market.
Recommendation
In order to be successful in the international market, Group Modelo should consider the following.
- The firm should conduct a competitor market research so as to develop an understanding of its competitors. This will aid in the formulation of effective competitive strategies.
- Group Modelo should also consider integration of Foreign Direct Investment as a market entry strategy.
- The firm should continuously analyze effectiveness of its marketing strategies such as its advertising strategy. This will aid the firm in improving its marketing efficiency.
- Prior to undertaking an acquisition, the firm should ensure that the target firm will contribute towards attainment of the intended synergy.
- In order to improve its distribution effectiveness in the international and domestic market, Group Modelo should consider entering into contract with well established distributors.
Works Cited
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Tremblay, Victor and Tremblay, Carol. The US brewing industry; data and economic analysis. 2005. Print.
United Nation. Foreign investment in Latin America and the Caribbean. Santiago: UN, ECLAC. 2006. Print.