Beer Fight: AB InBev vs. Guatemala's Brewing Dynasty
By Devin Leonard May 08, 2014
The colonial city of Antigua in Guatemala attracts many American tourists. They roam the cobblestone streets, snapping pictures of the historic churches. They purchase unusual-sounding wooden flutes from street vendors. And in the evening they retire to bars and drink prodigious amounts of inexpensive beer. “Tonight these places are going to be packed,” says Roberto Lara, strolling through the city on a sunny day in February.
This should hearten Lara, a vice president of Castillo Brothers, a Guatemalan conglomerate that owns shopping malls, cemeteries, power plants, and the country’s largest beermaker, Cervecería Centro Americana, also known as Central American Brewery. Its signature product is Gallo, a lager that takes its name from the label’s imperious rooster. Gallo, 118 years old, is Guatemala’s most famous beer.
But something is bothering Lara, a boyish 35-year-old who once worked as an investment banker for JPMorgan (JPM) in New York and who speaks impeccable English. He enters a grocery store and makes his way to the beer section. The shelves are packed with newer stuff, much of it made by AB InBev (BUD), the world’s largest beer company. Until three years ago, you wouldn’t find the multinational corporation’s brands such as Budweiser, Bud Light, and Stella Artois in Guatemala. Now they are everywhere.
Lara is especially perturbed about Brahva, a pilsner that AB InBev brews locally and has positioned as a direct competitor to Gallo. He notes that a 12-ounce can of Gallo is selling for 7 quetzals—that’s 90¢. Meanwhile, you can pick up a 24-can pack of Brahva for 72 quetzals. Lara takes out his iPhone and performs a quick calculation. “That comes out to 39¢ a can,” he says. A can of Coke, he notes, costs 3.75 quetzals, or 48¢. “We’ve always wondered, how low can these guys go? Well, now they are selling beer for less than soda. That’s never happened in Guatemala before.”
AB InBev, with headquarters in Leuven, Belgium, doesn’t just want to sell lots of Brahva in Guatemala. It would like to buy Lara’s company and dominate the country entirely. To be precise, the suitor is Ambev, AB InBev’s Brazilian-based division, which operates in Latin America and Canada. Ambev is a separate company with its own stock, but AB InBev Chief Executive Officer Carlos Brito was once the head of Ambev and is co-chairman of its board.
Lara is a fifth-generation member of Guatemala’s powerful Castillo family, which controls Castillo Brothers, and he says they won’t be bullied by foreigners: “Our shareholders are really emotionally tied to the company and the heritage.”
The Guatemalan market may not seem like much of a prize. It’s a small country where half the population lives in extreme poverty, meaning many Guatemalans traditionally can’t afford beer. “Guatemala has one of the lowest per capita beer consumption rates in the world outside of Muslim countries,” says Emma Peterson, a Latin American analyst at Euromonitor International. Instead they drink cheap rum or aguardiente, a moonshine-like beverage whose name means “burning water.”
For Ambev, this means growth opportunities. Its price slashing has already triggered a beer-drinking explosion in Guatemala. In the past three years, annual sales have risen 42 percent to $664 million in 2013, according to Euromonitor. Eventually, Ambev hopes to extract $1 billion in annual earnings before income taxes, depreciation, and amortization from Central America and the Caribbean.
Guatemala is also strategically important to Ambev because it’s next to Mexico, where AB InBev controls Grupo Modelo, the maker of Corona. In 2012 the company announced its plan to swallow the portion of Grupo Modelo it didn’t already own. It boasted in an investors’ presentation that Mexico was the fourth most profitable beer market after the U.S., Brazil, and Japan. The last thing AB InBev needs is for Central American Brewery to sully its Mexican triumph by pumping more Gallo into Mexico.
But Ambev may not be able to achieve its dreams in the region without persuading the Castillo family to part with their empire. Ambev rules the Dominican Republic after purchasing a majority stake in the country’s largest brewery for $1.24 billion in 2012. But it hasn’t gotten very far in Nicaragua or El Salvador. And in Guatemala, even with the deep discounting, Ambev has only a 20 percent market share, according to Euromonitor. Almost everything else is in the hands of the stubborn Castillos. To hear Ambev tell it, the family has a distinct advantage as the local hero. “When it comes to the law and the government,” says Jean Jereissati, who oversees Central America and the Caribbean for Ambev, “we are the underdog here.”
The Castillos trace their lineage back to Bernal Díaz del Castillo, a Spanish conquistador who settled in Guatemala. The family became a force there when brothers Rafael and Mariano Castillo founded Central American Brewery in 1886. They traveled to Germany to buy beermaking equipment and hire a brewmaster. The return trip was worthy of a Werner Herzog movie: There was no road back from the Atlantic coast to Guatemala City, so they transported their fermentation tanks by steamship on the Motagua River and constructed their brewery on the city’s outskirts.