The branding game: a disappointing quarter and a drop in domestic beer sales underscore the importance of Femsa CEO Jose Fernandez' mission to strengthen his family of brands and steal market share from Mexico's No. 1 beer maker

Latin CEO: Executive Strategies for the Americas, March, 2001 by Daniel J. McCosh

THE KNOWLEDGE BASE OF HIS COMPANY is something that Femsa CEO Jose Fernandez Carbajal is constantly thinking about. How to maximize the intelligence of his executive corps? How to utilize it? How best to expand it? He considers this brain trust one of his key assets. And his ability to exploit this treasure trove just might be the critical element in his fight to make US$4 billion Femsa a company with two No. 1 brands instead of just one.

Coca-Cola Femsa bottles the most popular and recognized soft drink in Mexico (as well as in Argentina). Sister company Femsa Cerveza doesn't enjoy the same advantage over its competitors, however. It's been stuck in the No. 2 spot for a long time, behind Mexican rival Grupo Modelo. Femsa controls 45 percent of the local market, compared to Modelo's 55 percent. The Modelo juggernaut is also the No. 5 beer maker in the world, a position bolstered by its production and export of the popular Corona.

Recognizing Coca-Cola as a leader in brand management, Fernandez first tried to hire Coca-Cola executives for his beer division. He never found the right fit. A longtime proponent of knowledge transfers throughout Femsa's operating divisions, Fernandez eventually realized the answer was in his own company At the beginning of 2000, Fernandez swapped the CEO of Femsa's beer division (which made up 36.6 percent of revenue and 45.1 percent of profits in 1999) with the head of Coca-Cola Femsa (32.5 percent of revenue and 31.8 percent of profits). "The CEO move was ingenious," says Salomon Smith Barney beverage analyst Jennifer Corrou.

The change brought operations expert Carlos Salazar to Coca-Cola and brand management guru Alfredo Martinez over to Femsa Cerveza.

Salazar focused on efficiencies. He closed two underutilized soft drink bottling plants this year in the Mexico City area, moving the machinery to neighboring plants. He now has his sights set on eliminating production bottlenecks.

Martinez took over the task of bringing more identity to Femsa's nine beer brands. In addition to its export brands (Tecate, Dos Equis and Sol) Femsa also produces Carta Blanca, Superior, Indio, Bohemia, Tecate Light and Dos Equis Oscura. Femsa remains largely regional, with its strongest sales in northern Mexico, where Carta Blanca and Tecate are market leaders and the company has 60 percent of its domestic beer sales. In central markets like Mexico City, Femsa is trying to position its Sol brand against the mighty Corona.

The Battle Plan

Evaluating the success of the CEO swap isn't black and white. While revenue and profits were up in the first nine months for both divisions, the numbers were amplified by price increases. Beer sales were up 10.3 percent to 13.4 billion pesos and income was up 9.9 percent to 2.48 billion pesos. On the Coca-Cola side, sales were up 9.5 percent to 11.7 billion pesos while income was up 40.1 percent to 2 billion pesos.

Disaster struck in the fourth quarter of 2000, however. Femsa issued a profit warning in December, saying that bad weather in northern Mexico, a drop in domestic beer sales, and credit tightening at the retail level would adversely affect income. By contrast, Modelo had a good quarter, increasing both its domestic and export sales.

On the Coca-Cola side, the picture is considerably rosier. Merrill Lynch predicts continued growth in volume and revenue, although problems may persist in Argentina, where sales have been down largely due to the economy

Overall Femsa reported revenue of xxxxx for 2000, down xx percent from 1999, and xxxxxx in profits, down xx percent. Looking forward, Merrill Lynch summed it up with: "Our expectations for 2001 are more subdued."

CEO Fernandez is clear on which of his two divisions needs the most work: beer. In February, it was rumored that Femsa may spinoff its beer division. In a strangely worded reply to inquiries from Mexican bolsa officials, Femsa said it "will continue to look at all alternatives," but that "no concrete alternative has been submitted to the board."

In the meantime, Fernandez has been focused on a few basic disciplines in his quest to strip market share from Modelo. "You have to get the right beer to each market," he says. "You can't tell people in a given region what they are going to drink. You can gradually change brand preferences, but it is a slow process, and it can be very risky to force brand changes."

The idea is to have a leading brand defined for every region in Mexico, as well as for exports. "Carta Blanca is the Coca-Cola of this town [Monterrey], but Tecate is the Sprite here. In Tijuana, Tecate is the Coke. In Mexico City we want Sol to be the Coca-Cola," he says.

Key to establishing brand equity is distribution, with proper focus on point-of-sale displays. For this, Femsa is borrowing the Coca-Cola philosophy of pre-sales. Fernandez describes pre-sales as "a sophisticated control to place which product with which retailer.

"This can't be done by simply relying on your retailer," he says. "You need to send out a professional with a hand-held computer who can spend an hour with mom-and-pop store owners to convince them to put the Carta Blanca in front, or lower, or to not put Bohemia here. ... Then the order can be placed and the driver just has to deliver."