Alcoholic Drinks in Mexico

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ALCOHOLIC DRINKS IN MEXICO
Euromonitor International December 2011

ALCOHOLIC DRINKS IN MEXICO

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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 Table 2 Table 3 Table 4 Table 5 Table 6 Number of On-trade Establishments by Type 2006-2011 .......................... 24 Taxation and Duty Levies on Alcoholic Drinks 2011 .................................. 25 Typical Wholesaler and Retailer Off-trade Mark-ups by Selected Categories 2011 ......................................................................................... 26 Selling Margin of a Typical Beer Brand 2011 ............................................. 26 Selling Margin of a Typical Wine Brand 2011 ............................................. 26 Selling Margin of a Typical Spirits Brand 2011 ........................................... 26 Taxation and Duty Levies ........................................................................................................... 25

Operating Environment............................................................................................................... 27 Contraband/parallel Trade ...................................................................................................... 27 Duty-free ................................................................................................................................. 28 Cross-border/private Imports .................................................................................................. 28 Market Indicators ........................................................................................................................ 28 Table 7 Table 8 Table 9 Table 10 Table 11 Table 12 Table 13 Retail Consumer Expenditure on Alcoholic Drinks 2006-2011 ................... 28 Sales of Alcoholic Drinks by Category: Total Volume 2006-2011 .............. 28 Sales of Alcoholic Drinks by Category: Total Value 2006-2011 ................. 29 Sales of Alcoholic Drinks by Category: % Total Volume Growth 20062011 ........................................................................................................... 29 Sales of Alcoholic Drinks by Category: % Total Value Growth 20062011 ........................................................................................................... 29 Sales of Alcoholic Drinks by Category by On-trade vs Off-trade Split: Volume 2011 .............................................................................................. 29 Sales of Alcoholic Drinks by Category by On-trade vs Off-trade Split: Value 2011 ................................................................................................. 30 Market Data ................................................................................................................................ 28

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Table 14 Table 15 Table 16 Table 17 Table 18 Table 19 Table 20 Table 21 Table 22

Sales of Alcoholic Drinks by Category by On-trade vs Off-trade Split: % Volume 2011 .......................................................................................... 30 Sales of Alcoholic Drinks by Category by On-trade vs Off-trade Split: % Value 2011 ............................................................................................. 30 Company Shares of Alcoholic Drinks by Global Brand Owner 20072011 ........................................................................................................... 30 Off-trade Sales of Alcoholic Drinks by Distribution Format: % Value Analysis 2006-2011.................................................................................... 31 Off-trade Sales of Alcoholic Drinks by Category and Distribution Format: % Volume Analysis 2011 .............................................................. 31 Forecast Sales of Alcoholic Drinks by Category: Total Volume 20112016 ........................................................................................................... 32 Forecast Sales of Alcoholic Drinks by Category: Total Value 20112016 ........................................................................................................... 32 Forecast Sales of Alcoholic Drinks by Category: % Total Volume Growth 2011-2016 ..................................................................................... 32 Forecast Sales of Alcoholic Drinks by Category: % Total Value Growth 2011-2016 ..................................................................................... 33

Definitions................................................................................................................................... 33 Published Data Comparisons ................................................................................................. 34 Summary 3 Research Sources ...................................................................................... 34

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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, highlyqualified 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.

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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 upperincome 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 upperincome 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

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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 ontrade 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

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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 lawbreakers, 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

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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.

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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.

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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

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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.

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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 mid2011 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

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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 br and 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

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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 socalled 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/highstrength 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

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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.

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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 spiritbased 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.

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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 Vodka Authenticity/heritage/ Pedro Domecq SA de small batch offerings: CV) 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 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 Niche audiences: female and younger drinkers. Casa Cuervo starts distributing Bols in

2011

2011

Bols (Casa Cuervo SA de CV)

Liqueurs

2011

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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 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 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 Targeting younger and female audiences, RTD Finlandia Frost has two different flavours: lemon and cranberry. It is the new superpremium RTD from Finlandia. It comes on 275ml glass bottles with 5% alcohol graduation 2011

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

Other blended Scotch whisky

2011

Diosa Blanca (Cervecería Minerva SA de CV)

Domestic premium lager

2011

Finlandia Frost (Casa Pedro Domecq SA de CV)

Spirit-based RTDs

2011

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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 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 Niche audiences: Female and younger drinkers . Heineken and Peñafiel group worked together on the launch of Sol Clamato. This beerbased RTD is meant for people who are not fond of beer, seeking to attract new clients Economising: Three Olives vodka presents its new size 1.5-litre bottle. This bottle targets discount stores, nightclubs and bars 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,

2011

Smirnoff Ice (Diageo México SA de CV)

Spirit-based RTDs

2011

Sol Clamato (Cervecería Cuauhtemoc Moctezuma SA de CV)

Beer

2011

Three Olives (Casa Cuervo SA de CV)

Vodka

2011

Adelita (Cervecería Revolución SA de CV)

Domestic premium lager

2010

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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 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 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 Premiumisation/pack aging: Tequila Don Julio changes it traditional bottle, refreshing its appearance and aiming for a younger consumer base 2010

Blackburn (Diageo de México SA de CV)

Other blended Scotch whisky

2010

Buchanan‟s Master (Diageo México SA de CV)

Other blended Scotch whisky

2010

Don Julio (Becle SA de CV)

Tequila (and mezcal)

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

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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 Packaging/premiumis ation: Tequila Jimador changes its bottles to let consumers know they changed their formula to 100% blue agave 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 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

Jimador (Casa Herradura SA de CV)

Tequila (and mezcal)

2010

Villa (Cervecería Revolución SA de CV)

Domestic premium lager

2010

Zapata (Cervecería Revolución SA de CV)

Domestic premium lager

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.

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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-

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premium products will prevail over the forecast period due to the wide array of imported, highend 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 Retailer Leading Specialist Retailers 2011 Outlets 40 204 48 19 11 11,800

La Europea SA de CV La Divina SA de CV Bodegas Alianza SA de CV Vinoteca de México SA de CV La Castellana SA de CV Independents
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

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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 BrownForman 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 midterm, 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

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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

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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

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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 ontrade 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 Subcategory 2006 100% home delivery/ takeaway Bars/pubs Cafés 2,676 24,931 2007 2,770 25,457 2008 2,879 26,346 2009 2,884 26,635 2010 2,915 27,007 2011 2,981 27,655 Number of On-trade Establishments by Type 2006-2011

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Full-service restaurants Fast food Self-service cafeterias Street stalls/kiosks
Source:

176,472 32,370 330,560

179,720 33,468 356,006

183,109 34,534 360,171

174,235 34,741 353,569

175,186 36,154 353,338

177,744 37,521 359,504

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/ Liquors Excise tax (% per bottle) 25 (less than 14 abv) n/a 16 1.75 Wine Spirits

30 (14-20 abv) n/a 16 0.0

50 (over 20 abv) n/a 16 0.0

Import tax Sales tax Environmental tax
Source: Secretaría de Hacienda, Secretaría de Salud

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Table 3

Typical Wholesaler and Retailer Off-trade Mark-ups by Selected Categories 2011 Beer C/p 15 20 Rum 15 15 RTDs 15 25 T 20 20 Wine 25 25 L 20 15 Wh 25 20 OS 20 20 BC 15 17

Wholesaler Retailer Wholesaler Retailer
Source: Note:

25 15 WS 15 15

Euromonitor International estimates 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 % retail value rsp

Selling Margin of a Typical Beer Brand 2011

2011 VAT Retailer Distributor Excise Manufacturer TOTAL
Source: Note:

31.0 9.0 12.0 14.4 33.6 100.0

Euromonitor International estimates, store checks Based on Corona Extra 355ml for Mx$9.00, at discounters. Excise includes any other tax as relevant

Table 5 % retail value rsp

Selling Margin of a Typical Wine Brand 2011

2011 VAT Retailer Distributor Excise Manufacturer TOTAL
Source: Note:

31.0 13.8 11.0 8.8 35.3 100.0

Euromonitor International estimates Based on La Cetto750ml at supermarkets for Mx$91.00. Excise includes any other tax as relevant

Table 6 % retail value rsp

Selling Margin of a Typical Spirits Brand 2011

2011 VAT Retailer Distributor Excise Manufacturer TOTAL
Source: Note:

42.5 9.6 9.6 30.7 7.7 100.0

Euromonitor International estimates Based on Jimador 950ml at supermarkets for Mx$139.00. Excise includes any other tax as relevant

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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

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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 Mx$ million 2006 Total
Source: Note:

Retail Consumer Expenditure on Alcoholic Drinks 2006-2011

2007 127,099.6

2008 138,396.0

2009 140,761.3

2010 151,067.8

2011 157,972.1

119,012.3

Euromonitor International from trade associations, trade press, company research, trade interviews, trade sources 2011 data is forecast

MARKET DATA
Table 8 Million litres 2006 Beer Cider/Perry RTDs/High-Strength Premixes Spirits Wine Alcoholic Drinks
Source:

Sales of Alcoholic Drinks by Category: Total Volume 2006-2011

2007 6,314.9 12.6 121.6 202.3 57.9 6,709.4

2008 6,460.6 12.9 128.7 204.9 60.6 6,867.7

2009 6,522.2 12.1 130.1 204.0 59.3 6,927.6

2010 6,374.6 12.3 135.8 211.4 63.1 6,797.1

2011 6,709.8 12.1 141.0 213.5 66.9 7,143.3

6,040.6 12.9 115.8 199.4 46.5 6,415.2

Euromonitor International from official statistics, trade associations, trade press, company research, store checks, trade interviews, trade sources

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Table 9 Mx$ million

Sales of Alcoholic Drinks by Category: Total Value 2006-2011

2006 Beer Cider/Perry RTDs/High-Strength Premixes Spirits Wine Alcoholic Drinks
Source:

2007 190,490.3 591.2 5,010.5 69,248.5 12,047.7 277,388.3

2008 219,738.3 605.9 5,550.4 72,606.8 13,947.5 312,448.9

2009 231,986.2 599.0 5,868.1 73,016.1 14,222.3 325,691.7

2010 240,959.6 634.8 6,176.6 79,536.5 16,006.8 343,314.3

2011 265,020.8 647.1 6,436.1 84,783.0 17,652.7 374,539.7

158,806.5 609.6 4,683.3 64,607.1 9,513.6 238,220.1

Euromonitor International from official statistics, trade associations, trade press, company research, store checks, trade interviews, trade sources

Table 10

Sales of Alcoholic Drinks by Category: % Total Volume Growth 2006-2011

% total volume growth 2010/11 Beer Cider/Perry RTDs/High-Strength Premixes Spirits Wine Alcoholic Drinks
Source:

2006-11 CAGR 2.1 -1.2 4.0 1.4 7.6 2.2

2006/11 Total 11.1 -6.1 21.7 7.1 43.9 11.3

5.3 -1.4 3.9 1.0 6.1 5.1

Euromonitor International from official statistics, trade associations, trade press, company research, store checks, trade interviews, trade sources

Table 11

Sales of Alcoholic Drinks by Category: % Total Value Growth 2006-2011

% local currency, current value growth 2010/11 Beer Cider/Perry RTDs/High-Strength Premixes Spirits Wine Alcoholic Drinks
Source:

2006-11 CAGR 10.8 1.2 6.6 5.6 13.2 9.5

2006/11 Total 66.9 6.2 37.4 31.2 85.6 57.2

10.0 1.9 4.2 6.6 10.3 9.1

Euromonitor International from official statistics, trade associations, trade press, company research, store checks, trade interviews, trade sources

Table 12

Sales of Alcoholic Drinks by Category by On-trade vs Off-trade Split: Volume 2011 Off-trade On-trade 1,395.3 1,021.8 10,531.5 TOTAL 6,709.8 12,118.4 141,020.9

Beer (million litres) Cider/Perry ('000 litres) RTDs/High-Strength Premixes ('000 litres)

5,314.5 11,096.5 130,489.4

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Spirits ('000 litres) Wine (million litres) Alcoholic Drinks (million litres)
Source:

149,075.0 43.2 5,648.4

64,376.7 23.8 1,494.9

213,451.7 66.9 7,143.3

Euromonitor International from official statistics, trade associations, trade press, company research, store checks, trade interviews, trade sources

Table 13

Sales of Alcoholic Drinks by Category by On-trade vs Off-trade Split: Value 2011

Mx$ million Off-trade Beer Cider/Perry RTDs/High-Strength Premixes Spirits Wine Alcoholic Drinks
Source:

On-trade 121,136.6 176.9 1,917.5 53,428.3 11,391.8 188,051.1

TOTAL 265,020.8 647.1 6,436.1 84,783.0 17,652.7 374,539.7

143,884.3 470.2 4,518.6 31,354.7 6,260.9 186,488.7

Euromonitor International from official statistics, trade associations, trade press, company research, store checks, trade interviews, trade sources

Table 14

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

% volume analysis Off-trade Beer Cider/Perry RTDs/High-Strength Premixes Spirits Wine Alcoholic Drinks
Source:

On-trade 20.8 8.4 7.5 30.2 35.5 20.9

Total 100.0 100.0 100.0 100.0 100.0 100.0

79.2 91.6 92.5 69.8 64.5 79.1

Euromonitor International from official statistics, trade associations, trade press, company research, store checks, trade interviews, trade sources

Table 15

Sales of Alcoholic Drinks by Category by On-trade vs Off-trade Split: % Value 2011

% value analysis Off-trade Beer Cider/Perry RTDs/High-Strength Premixes Spirits Wine Alcoholic Drinks
Source:

On-trade 45.7 27.3 29.8 63.0 64.5 50.2

Total 100.0 100.0 100.0 100.0 100.0 100.0

54.3 72.7 70.2 37.0 35.5 49.8

Euromonitor International from official statistics, trade associations, trade press, company research, store checks, trade interviews, trade sources

Table 16

Company Shares of Alcoholic Drinks by Global Brand Owner 2007-2011

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% total volume Company Modelo SA de CV, Grupo Heineken NV Pernod Ricard Groupe Anheuser-Busch InBev NV Brown-Forman Corp Grupo Cuervo SA de CV Productos de Uva SA de CV Bacardi & Co Ltd Diageo Plc SABMiller Plc Others Total
Source:

2007 51.5 0.4 1.1 0.7 0.4 0.3 0.4 0.2 0.3 44.7 100.0

2008 51.8 0.3 1.1 1.1 0.8 0.4 0.3 0.4 0.2 0.3 43.3 100.0

2009 52.6 0.3 1.1 1.0 0.8 0.4 0.3 0.4 0.2 0.2 42.6 100.0

2010 53.1 38.6 1.2 1.0 0.9 0.4 0.4 0.4 0.3 0.2 3.6 100.0

2011 52.7 39.1 1.2 0.9 0.9 0.4 0.4 0.4 0.3 0.2 3.5 100.0

Euromonitor International from official statistics, trade associations, trade press, company research, store checks, trade interviews, trade sources

Table 17

Off-trade Sales of Alcoholic Drinks by Distribution Format: % Value Analysis 2006-2011

% off-trade 2006 Store-Based Retailing - Grocery Retailers - - Discounters - - Food/drink/tobacco specialists - - Hypermarkets - - Small Grocery Retailers - - - Convenience Stores - - - Forecourt Retailers - - - Independent Small Grocers - - Supermarkets - - Other Grocery Retailers - Non-Grocery Retailers Non-Store Retailing - Direct Selling - Homeshopping - Internet Retailing - Vending Total
Source:

2007 99.4 96.5 4.9 30.8 8.9 46.4 19.3 2.3 24.9 5.4 2.9 0.6 0.6 100.0

2008 99.3 96.1 5.2 30.6 9.1 45.8 20.0 2.4 23.4 5.4 3.2 0.7 0.7 100.0

2009 99.3 96.3 5.9 29.8 9.4 45.8 20.1 2.4 23.3 5.4 3.0 0.7 0.7 100.0

2010 99.3 96.3 6.0 31.4 8.8 45.2 20.1 2.4 22.7 4.9 3.0 0.7 0.7 100.0

2011 99.2 96.2 6.1 31.1 9.0 45.1 20.3 2.1 22.8 4.9 3.0 0.8 0.8 100.0

100.0 97.1 4.6 29.5 9.4 47.8 18.7 2.2 26.9 5.8 2.9 0.0 0.0 100.0

Euromonitor International from official statistics, trade associations, trade press, company research, store checks, trade interviews, trade sources

Table 18

Off-trade Sales of Alcoholic Drinks by Category and Distribution Format: % Volume Analysis 2011

% off-trade B Store-Based Retailing Grocery Retailers 99.3 96.3 C/P RTDs/HSPs 100.0 99.0 100.0 99.0 S 99.0 93.2 W 98.3 96.9

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Discounters Food/drink/tobacco specialists Hypermarkets Small Grocery Retailers Convenience Stores Forecourt Retailers Independent Small Grocers Supermarkets Other Grocery Retailers Non-Grocery Retailers Non-Store Retailing Direct Selling Homeshopping Internet Retailing Vending Total
Source: Key:

6.2 32.2 8.5 45.0 20.0 2.0 23.0 4.5 0.0 3.0 0.7 0.0 0.0 0.7 0.0 100.0

27.0 21.0 16.0 20.5 2.0 0.0 18.5 14.5 0.0 1.0 0.0 0.0 0.0 0.0 0.0 100.0

7.0 9.5 27.0 41.0 26.5 0.0 14.5 14.5 0.0 1.0 0.0 0.0 0.0 0.0 0.0 100.0

7.5 52.0 17.0 8.0 4.5 0.0 3.5 8.8 0.0 5.8 1.0 0.0 0.0 1.0 0.0 100.0

5.3 28.8 24.8 2.0 2.0 0.0 0.0 36.0 0.0 1.4 1.8 0.3 0.0 1.5 0.0 100.0

Euromonitor International from official statistics, trade associations, trade press, company research, store checks, trade interviews, trade sources B = beer; C/P = cider/perry; RTDs/HSPs = flavoured alcoholic beverages; S = spirits; W = wine

Table 19 Million litres

Forecast Sales of Alcoholic Drinks by Category: Total Volume 2011-2016

2011 Beer Cider/Perry RTDs/High-Strength Premixes Spirits Wine Alcoholic Drinks
Source:

2012 6,865.6 11.9 146.2 217.1 71.8 7,312.6

2013 7,038.4 11.8 151.8 220.6 76.9 7,499.6

2014 7,309.9 11.6 157.3 223.6 82.7 7,785.0

2015 7,519.1 11.5 162.9 226.5 89.0 8,009.0

2016 7,715.1 11.3 168.2 229.9 96.1 8,220.6

6,709.8 12.1 141.0 213.5 66.9 7,143.3

Euromonitor International from trade associations, trade press, company research, trade interviews, trade sources

Table 20 Mx$ million

Forecast Sales of Alcoholic Drinks by Category: Total Value 2011-2016

2011 Beer Cider/Perry RTDs/High-Strength Premixes Spirits Wine Alcoholic Drinks
Source:

2012 271,900.1 637.6 6,618.9 87,320.3 18,983.3 385,460.3

2013 279,956.7 627.6 6,814.6 89,849.8 20,368.3 397,617.0

2014 292,109.1 618.4 7,008.5 91,963.0 21,969.1 413,668.1

2015 301,863.5 610.4 7,207.0 94,279.8 23,686.2 427,646.9

2016 311,035.6 601.9 7,395.8 96,881.4 25,658.0 441,572.6

265,020.8 647.1 6,436.1 84,783.0 17,652.7 374,539.7

Euromonitor International from trade associations, trade press, company research, trade interviews, trade sources

Table 21

Forecast Sales of Alcoholic Drinks by Category: % Total Volume Growth 2011-2016

% total volume growth

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2015/16 Beer Cider/Perry RTDs/High-Strength Premixes Spirits Wine Alcoholic Drinks
Source:

2011-16 CAGR 2.8 -1.4 3.6 1.5 7.5 2.8

2011/16 Total 15.0 -6.6 19.3 7.7 43.6 15.1

2.6 -1.3 3.2 1.5 8.0 2.6

Euromonitor International from trade associations, trade press, company research, trade interviews, trade sources

Table 22

Forecast Sales of Alcoholic Drinks by Category: % Total Value Growth 20112016

% local currency, constant value growth 2011-16 CAGR Beer Cider/Perry RTDs/High-Strength Premixes Spirits Wine Alcoholic Drinks
Source:

2011/16 TOTAL 17.4 -7.0 14.9 14.3 45.3 17.9

3.3 -1.4 2.8 2.7 7.8 3.3

Euromonitor International from trade associations, trade press, company research, trade interviews, trade sources

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

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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 c arries 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)

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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

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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

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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

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