Spinning the Bottle

There are some interesting developments afoot among beverage companies south of the border. The relationship between brewers, soft-drink makers and bottlers in Mexico is evolving and the landscape is likely to look different there by this time next year.

On the one side, there's the all-powerful Anheuser-Busch InBev (BUD - commentary - Trade Now), which owns Brazilian brewer AmBev (ABV - commentary - Trade Now) and a stake in Mexican brewer Grupo Modelo. A-B InBev also has a strong relationship with PepsiCo (PEP - commentary - Trade Now): the two recently announced a joint purchasing agreement to lower procurement costs, and AmBev is Pepsi's largest and most profitable bottler outside the United States.

There are tremendous advantages to integrating soft drinks and beer. There are purchasing synergies, for one, generated from procuring materials like aluminum and cardboard in greater scale. There are also selling and distribution benefits - sharing trucks and salespeople, for example - stemming from overlapping points of sale between soda and beer. Plus, greater scale within the trade provides more muscle with its customers. Not to mention warehousing and other similar functions.

AmBev has perfected the model in Brazil and Argentina. If A-B InBev were to snatch the rest of Modelo from the controlling families (who will be feeling mounting pressure to surrender), it would gain more than access to an attractive beer market. It might also convince Pepsi to sell its soft-drink operations in Mexico and, through AmBev, extend its successful beer and soft-drink model.

On the other side, there's FEMSA (FMX - commentary - Trade Now), Mexico's No. 2 brewer, whose soft-drink operation, Coca-Cola FEMSA (KOF - commentary - Trade Now), is the largest bottler of Coca-Cola products in Latin America and the second largest in the world. It also owns Oxxo, the biggest and fastest-growing convenience store chain in Mexico, with over 6,800 stores that exclusively sell FEMSA's beer brands. The amalgamation of beer, soft-drink bottling and retail makes strategic sense, though the model has been botched; beer and soda have not been fully integrated.

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At time of publication, Norton was long BUD, FMX and SBMRY, though positions may change at any time.

Charles Norton is a principal of GNI Capital, a long/short equity investment management firm, where he is responsible for portfolio management and investment research for all of the company's managed assets. Previously, Norton had been a vice president in the equity research department of Gotham Capital Management, a New York-based hedge fund, where he also managed separate long/short equity accounts. Prior to his experience on the buy side, he worked in the investment banking division of Smith Barney.

Norton has a Bachelor of Science in Management degree in finance from Tulane University's A.B. Freeman School of Business, and is a CFA charterholder. He is a member of the CFA Institute and the CFA Society of Dallas-Fort Worth. While Norton cannot provide investment advice or recommendations, he appreciates your feedback; click here to send him an email.