Summer war brewing over $1 billion beer industry

Coors Light and Medalla Light battle over island’s No. 1 spot; summer beer sales to drop 8% to 12% due to new beer tax

Editor’s note: Not since the mid-1990s has Puerto Rico seen the makings of a real consumer product battle like the cola wars of that time–where, as is still true today, Coca-Cola dominated both in dollar sales volume as well market share. But not even at the height of the cola war did the market see the kind of fierce battle that is brewing for the island’s No. 1 best-selling beer spot.

Following is the first article of a two-part series on Puerto Rico’s beer war.

Heating up the beer war is Gov. Luis Fortuño’s new beer tax—30¢ a gallon on all imported beer and 40¢ a gallon on locally manufactured beer—which will force all beer companies to increase prices and result in the inevitable shrinkage of the beer category by an estimated 8% to 12%.

Let’s get ready to rumble! On one end, with a 33.6% volume market share during the initial two months of the May-August summer season, is Coors Light—the incumbent No. 1 best-selling beer in Puerto Rico for the record 10-plus-year stretch. On the other hand, is Puerto Rico’s own Medalla Light, brewed by Mayagüez’s Cervecería India, which a little more than 10 years ago didn’t even register on the sales radar.

Now, as the hot summer season gets underway, accounting for the second-most-important sales period of the year, Medalla Light closely trails in second place with a 33.1% volume market share—a mere 0.5% away from the No. 1 spot in volume sales, according to the latest market study from Information Resource Inc. IRI’s market study tracks the island’s beer retail sales, not including wholesale. Still, IRI’s report captures more than 80% of the local beer-market activity.

Both Coors Light and Medalla Light are pouring huge amounts of money into either protecting or snatching the coveted No. 1 beer spot. CARIBBEAN BUSINESS estimates this year’s total beer advertising and promotions investment from all beer companies during the four-month summer period will exceed $250 million—an increase of $50 million over last year’s already high investment.

New beer tax sparks beer war
Adding excitement to the mix are higher beer retail prices, driven by Fortuño’s newly imposed beer tax, a reversal from the governor’s promise to beer and other alcoholic beverage companies.

The new tax not only is going to impact immediate sales but, for the first time, it also will likely change market composition, explained IRI’s Commercial Director Edwin Aquino.

The new tax, primarily 30¢ a gallon on all imported beer and 40¢ a gallon on locally manufactured beer, is one of several economic-recovery initiatives included in Fortuño’s criollo economic-stimulus package.

The new law also leaves intact the tax scale applied to locally manufactured beer, which essentially maintains local beers’ preferential tax, primarily applicable to Medalla Light, manufactured by Cervecería India, while aggravating taxes on all imported beers.

Beer-tax revenue in 2008 reached $198.9 million, a sharp decline from the $223.3 million in 2003. “This will make those tax-revenue projections even more difficult to attain since the locally manufactured beer (i.e., Cervecería India’s Medalla Light) is still paying $1.80 less per gallon in taxes than imported beer under the new law. The Puerto Rico Treasury Department (Hacienda) stands to lose $1.8 million in tax revenue per million gallons of shifted sales from imported beer to local beer,” Aquino explained.

The Fortuño tax, deemed by many industry insiders as a total reversal of the governor’s initial commitment, comes as a hard blow to an industry that was slowly on its way to recovery from former Gov. Sila Calderón’s 2002 Silazo tax.

Will Puerto Rico get a new beer champion?
Thanks to the new beer tax, for the first time in history, Medalla Light will increase its aggressive 99¢ for a 10-ounce can to $1.25 plus the sales & use tax—thus challenging Medalla Light customers to truly evaluate if they have been drinking the local brew because it was the cheapest or because they truly liked its flavor. As the old saying goes…the jury is still out on that one.

“The new beer tax will also hit imported beers, particularly market leader Coors Light, which now sells for more than $1.40 plus the sales and use tax for the same 10-ounce can. Pundits speculate that if Coors Light plays its cards right and substantially invests in protecting its market share, many Medalla Light customers will graduate to Coors Light, a bit more expensive than the local brand but, for just a little bit more money, consumers may perceive they are getting a better-quality beer,” IRI’s Aquino said.

Meanwhile, premium brands such as Heineken, the industry’s third-best-selling beer, probably will retail for more than $2 plus the sales tax. However, as the leading premium beer in the market, more sophisticated consumers and even some of those Coors Light consumers who are getting older, may choose to stick with a more grown-up lifestyle-beer choice such as Heineken.

In addition to Fortuño’s beer tax, other ingredients making this industry even more interesting are a recessionary economy; an important shift in demographics that continues to influence consumers’ choices; newcomer brands such as Peroni and Stella Artois that have comfortably found their spot in the beer category; and the government-employee layoffs that will directly impact consumer confidence.

On the subject of taxes, Javier Soler, regional vice president & general manager of MillerCoors Brewing Co., continues to fight the fight of imported beers, which would like the preferential tax afforded to Medalla Light eliminated.

However, after six years of losing legal wars all the way up to the U.S. Supreme Court, their hopes of seeing any kind of a level playing field in this area may be dwindling.

“For instance, if a case of beer sells for $22.50 locally, more than $9 of that goes to the government via sales and excise taxes. Undoubtedly, that is affecting product consumption which, in the end, affects tax-revenue collections for the government. Meanwhile, we remain grateful for the unwavering loyalty of our customers,” Soler said.

A lot is at stake
For starters, Puerto Rico’s beer industry, although it has been shrinking at an annual rate of 2% to 5% in sales during the past-five-consecutive years, still accounts for nearly $1 billion in annual sales that help support 5,200 direct and indirect jobs. Beer-industry executives expect the additional 800 to 1,000 summer jobs typically created as a result of companies’ emphasis on promotions and special events will also be reduced as a result of the beer-tax hike.

Notwithstanding, the promotions category continues to show growth as a percentage of beer advertising dollars, accounting for as much as 40% of summer beer budgets. Summer beer sales alone contribute well over $200 million in retail dollar sales to fuel local economic activity.

Luis Álvarez, vice president of Méndez & Co.’s liquor division and exclusive distributor of Heineken, reflects on the current market conditions, stating: “Indeed, we are seeing a beer category that is contracting due to a number of factors but primarily because there is less available income in consumers’ pockets. As key industry players, I welcome difficult economic times as it challenges us to reinforce the value proposition of our products and stand behind the real benefits our brands deliver to customers,” the Heineken executive said.

“Like Darwin’s theory of the survival of the fittest, those who adapt will survive. The same will happen to beer companies. The real fight for the survival of the best beer brands begins right now with the beginning of the toughest summer season our industry has ever seen,” Álvarez continued.

Beyond taxes, other factors threaten to flatten beer sales this summer. “There are important changes like crude-oil prices, which have slowly declined and, if they remain at a fairly stable level, the rest of the year should give beer companies some breathing space. However, we are most concerned by the shift in population demographics, a rapidly aging population coupled with worrisome levels of local unemployment. All this will also impact beer sales in the long run,” IRI’s Aquino said, adding the summer battle will be waged as a “price vs. value war. This beer war will be very tactical. We have yet to see which beer will make this summer cooler, who will top the advertising scale and who can go the longest in this very tough beer war.”

Will Coors Light prevail?
The summer season represents one-third of the segment’s annual sales, or roughly $300 million during the four-month period. Against all odds, beer players interviewed by CARIBBEAN BUSINESS said they are ready for the fight of their lives and committed to give local customers a fun-filled summer.

Stopping at nothing, the beer war has already begun as companies pour an estimated $270 million into the local economy to make their summer advertising, marketing and promotions the most appealing for consumers.

So, will Coors Light prevail as Puerto Rico’s best-selling beer? “That’s our goal,” MillerCoor’s Soler quickly replied.

“We are 100% committed to this market, among the country’s top-performing markets for Coors Light, and to the values the brand delivers for our customers. The new beer tax took us by surprise, but we are ready and looking forward to a very successful summer season,” he said.

“In terms of IRI’s projections, the latest report for the summer season covering May and June contemplates Medalla Light as having grown from a volume standpoint because, for that period, Medalla Light was the only one that didn’t increase prices, so it grew in volume but not in value, while Coors Light maintained a 6% lead in value as category leader,” Soler explained, adding he is skeptical about the IRI report, which doesn’t cover wholesale and military-store sales, both which, according to Soler, represent a large portion of segment sales through Sam’s, Montalvo Cash & Carry and the military stores.

IRI’s Aquino quickly replied, adding, “That is correct. However, our report, which covers retail, picks up the vast majority of wholesale through the retail channel, accounting for more than 80% of the market activity, more than enough to provide an accurate picture of market trends and important changes as has been our forecast with Medalla Light closely inching to the No. 1 spot, ever so slowly, over the past six years.”

Medalla Light after the gold
Meanwhile, Puerto Rico’s own local beer continues its pursuit of the golden No. 1 spot. Going into the summer season, Medalla Light is fortunate recent plant layoffs by the Mayagüez brewery haven’t affected its product image. In addition to the new tax hike, Cervecería India recently increased its regular price, leaving behind the attractive under-$1 claim.

“Our beer is our strength,” insists Camalia Valdés, president of Cervecería India, brewery of Medalla Light. “Our most powerful weapon to fight the present economic situation and the imposition of new taxes as well as our competitors is the renowned quality of Medalla Light. We are confident about our consumers’ loyalty.”