Solidly silver: Mexico's FEMSA hopes to become No. 2 in Brazil's highly competitive suds market.

Last summer in Brazil the mercury rose without relief. The heat arrived alongside bikinis and Sol beer, the biggest bet by Mexican beverage giant FEMSA to place itself as a robust alternative for Brazilian beer drinkers.

In 2006, FEMSA entered the largest beer market in Latin America, through its FEMSA Cerveza unit, with the acquisition of 68% of the Brazilian brewer Kaiser, for US$68 million. The purchase gave the Mexican company eight beer plants in Brazil.

"We aim to be a very strong and very profitable second player, within a time frame of two years," says Juan Fonseca, director of investor relations for FEMSA. The Brazilian beer wars began last summer with an ad campaign for the relaunching of Kaiser--then a weakened brand in Brazil--and the introduction of Sol Pilsen, a version of the traditional Mexican brand reformulated to Brazilian tastes.

Ambev, Brazil's largest brewery, responded with the introduction of Puerto del Sol, a lager similar to the Mexican product. FEMSA demanded that Brazilian authorities suspend the sale of this product, arguing illegal competition since the name and appearance of the beer were so similar to that of its own, so much so that it confused the consumer. Ambev replied that Puerto del Sol was already planned before FEMSA arrived.

Just three months after the start of the ad campaign, FEMSA's sales in Brazil nevertheless grew at double-digit rates, besting even its own expectations. "We intend to dedicate a significant part of our resources to supporting the marketing of the brand [Sol], which is growing very well from a starting point of zero, where it was last October," Fonseca says.

This year, FEMSA has set aside $30 million for Brazil out of a global operations budget of $890 million. "You should expect a high level of investment and innovation. We intend to be present in all spaces in the Brazilian industry," Fonseca says.

The battle won't be easy. Sol is fighting for space between Skol and Brahma, the best selling brands of Ambev, which has been for a long time the king of the sector and which accounts for nearly 68% of the domestic beer market. FEMSA Cerveza Brasil has 8.5% of the market, according to AC Nielsen, but its long-term expectations are for a 14% market share.

Last year, FEMSA Cerveza Mexico had total sales, excluding Brazil, of $2.90 billion. Its Brazilian operations added another $394 million. For the first quarter of 2007, FEMSA Cerveza Mexico's sales volume rose by 2.6%, while Brazil's rose by 14.4%, compared to the same period in 2006.

Sunny. Although competition will be tough, FEMSA's outlook in Brazil could not be better. The sector has been boosted by an increase in Brazilian incomes coupled with a drop in production costs. "This is the ideal moment for the introduction of new brands, given the market growth," says Marcos Mesquita, superintendent of the National Syndicate of the Beer Industry.

In 2006, the Brazilian beer sector moved close to 10 billion liters, with an average per capita consumption of 52 liters, below the levels of countries such as Venezuela and Mexico, which have a per capita consumption of 70 and 56 liters, respectively. The figures show there is still room to grow. "Last year, industry-wide sales were $10.5 billion. Conservatively speaking, this year it could grow 4.5%," says Mesquita.

In great measure, FEMSA's challenge in Brazil will be to broaden its distribution power. Currently it depends on third parties for sales and distribution in 75% of Brazil. It's looking to buy a bottler, in order to integrate its beer into its Coca-Cola FEMSA operations.

In Argentina, where FEMSA produces soft drinks, the company is also pondering introducing its beers, following its failed bid to buy some assets from Ambev in that country. FEMSA is looking at its options to introduce its beers in Argentina, where Ambev has 92% of the market. Whether it is through an acquisition or a joint venture, the Mexican company has an invaluable advantage: the logistical support provided by Coca-Cola FEMSA.

"FEMSA has the size and the knowledge in many regions to obtain a greater market penetration and to grow even more," says Mauricio Brocado, director of analysis for brokerage house Actinver.

MARISOL RUEDA * MEXICO CITY