Concerns over immigration from our neighbors to the south have loomed large this primary season, with the GOP candidates in agreement regarding the dangerous exports of one country in particular: Mexico. However, before we erect more walls between us and our third largest trading partner, it behooves our would-be presidents to walk the streets of Mexico City, or tour the Baja California region, and see Mexico through the lens of its most recent market trend: craft beer.
In 2010, SAB Miller and ACERMEX (a trade association representing Mexican microbrewers) launched a complaint with Mexico’s Federal Competition Commission (CFC) castigating the two largest beer producers, Grupo Modelo and Cuauhtémoc Moctezuma, for abusing market power by forcing exclusivity agreements on their customers. (The duopolists, who control 98% of the Mexican market, provide incentives and disincentives to restaurants, bars, hotels and convenience stores that effectively keep their competition off the shelves.) After three years of debate, the CFC ruled in favor of SAB Miller and ACERMEX, though fell short of full market liberalization. Currently, the CFC guarantees open and unrestricted access to “on-trade” channels (bars, restaurants, hotels) and caps exclusive arrangements made on “off-trade” channels, (convenience stores) to 20% of market. The result has been a doubling of the total number of craft breweries and triple-digit growth for the larger Mexican craft brewers such as Cerveceria de Baja California (Baja) and Cerveceria Minerva (Minerva).
Historically, Mexico’s duopolists offered just two types of beer: standard lager and stout. But younger Mexicans, with their thirsty, youthful palates, demand greater selection and a quality product. Unsurprisingly, the west coast American beer culture has found a natural home in the Mexican state of Baja California, birthplace of Baja and their Cucapa line of beer. The selection of craft products is dazzling for a region with limited beer selection. Next to standard fare like Cucapa Clasica, a blonde ale, one can pick up Cucapa Chupabras, an American inspired pale ale, the Cucapa Barley Wine, or the Cucapa La Migra Imperial Stout. And while the combined craft beer market still holds less than 1% of the marketplace, it has been growing at more than 50% a year. Minerva, which started in 2004 with three employees, now has a staff of 48 and a new production facility that will likely push production beyond 1.5 million liters next year.
While beer consumption is declining in the developed world, the past twenty years of economic growth in Latin America has led to a burgeoning cultural shift, the effect of which can be seen in the demands of a middle class opting for premium products. Rather than picking up six-packs of Corona or a case of Tecate to bring back to a house party, Mexicans are now going to sports bars to root for their soccer teams and trying new beers by the pint. Of course, not all of these suds are craft, and there is indication that the international giants are setting up shop as well. While the CFC was debating for three years on what to do with the Mexican duopolists, something interesting happened: multinational brewers bought the duopolists (Heineken purchased Moctezuma in 2010; Anheuser Busch InBev (ABInBev) landed Grupo Modelo in 2013). Heineken and ABInBev, titans of the global Anglo-European beer market, have put serious chips on the table, betting that Latin American beer drinkers will fuel their growth for the next two decades. Both companies, while eyeing all of Latin America, found Mexico to be the ideal launching pad for leveraging their international brands and for attempting to fix Mexico’s now struggling domestic brands.
The CFC ruling and the resulting boom in craft beer is a phenomena that fits the political and policy narrative of President Enrique Pena Nieto’s administration. Nieto’s election marked a return to power of Mexico’s Industrial Revolutionary Party (PRI) after a 12-year hiatus. The PRI, still viewed with a level of distrust among the population resulting from years of dictatorial rule, is looking to rebrand itself as a competent steward of Mexico’s democracy by embracing privatization and enforcing the rule of law. While Mexico’s energy market reform and confrontations with local corruption are taking up most of the headlines in the major media outlets in North America, genuine attempts at reducing barriers to entry, incentivizing entrepreneurial actions, and providing consumer choice are showing real progress on the ground.
While craft beers are flying off the shelves, there is still work to be done. I recently spent ten days in Mexico trying out the various brews and was left yearning for a nice, clean German Hefeweizen or a crisp West Coast IPA, but encountered too much oxidation in most of the beers (regardless of the brand)—a sign of poor distribution and storage by the vendors and shopkeeps. Sadly, finding a Mexican craft beer that did not taste too bitter or had a soapy finish proved difficult (likely a result of contaminated brewing systems). However, I found great promise in the unique flavors and the different approaches to a product that the Germans historically tried to keep to a strict commodity. Just like in other parts of their economy, Mexicans need to invest in quality control and use competition to produce better products for a changing world. What tasted sort of sour to me this past month, I expect to taste far better in 2016.
A country that is looking to spur growth and ingenuity by promoting competition is already finding a path for opportunity. While American politicians and regulators ponder the endless addendums to financial market “reform” and look to defend their own entrenched interests against new ideas, maybe they should grab a good brew and think about the process that led our West Coast IPA to their table.
Today we are sipping on nice American craft beer; by 2020, it may be American-inspired Mexican IPAs. No wall is going to keep our consumers from enjoying the best they can afford.
Kevin Telford spent over a decade in the energy industry and is currently founder and CEO of Renascentia Capital, a Washington, D.C., investment firm.
