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7 success stories. (Cover).

Let's face it: 2001, for most businesses, was a slow, if not negative growth year. With retail sales down, third-quarter GDP growth coming in at 1.6% below the same period last year and a U.S. economic downturn exacerbated by the Sept. 11 terrorist attacks, you wouldn't be blamed for thinking that most of the nation's corporate giants suffered through a year they'd rather forget. Although job-shedding and cost-cutting were the bitter medicines that many--especially the nation's exporters--had to swallow to make it through these tough economic times, there are a few standout companies that just seem immune to the present turmoil.

We have highlighted seven Mexican companies--Cemex, Telmex, Bachoco, Grupo Modelo, Walmex, America Movil and Elektra--which have stood out not only for their positive sales growth and buy-list recommendations at brokerage houses, but for their sound strategies for how to face an uncertain 2002. There are, of course, more companies that did well in 2001, but by talking to analysts and researching company stats, the BUSINESS MEXICO editorial staff arduously narrowed the list down to these lucky seven.

Each company report gives a rundown of company performance for the year and includes not only comments from the companies' high-level executives, but the opinions and projections of brokerage house analysts. We hope that the finished product will give our readers some insight into the secrets of how these corporate leaders remain so successful, even during uncertain times.

Cemex

The cement giant has managed concrete earnings in a mixed year

by Dean Ilott

In a year of recession that has included a 6% drop in national cement production and a decline in public works, one would expect Mexico's top cement producer Cemex to be wondering how to shore up sales and stop its investors from heading for the exits. But the Monterrey-based cement giant has shown remarkable resilience this year, and is on course to close 2001 with cash earnings of US$1.7 billion, with healthy sales growth and satisfied shareholders, a company source told

BUSINESS MEXICO.

Indeed, Cemex is looking good to ride out the current down cycle and come back stronger than ever, with some timely acquisitions that include the US$3 billion takeover of U.S. cement company Southdown at the end of last year. Southdown's results are being consolidated into Cemex's other U.S. operations this year, and are largely responsible for the 217% sales revenue increase in the U.S. market in the third quarter of 2001. Meanwhile, further consolidation of its operations in Spain assured Cemex's leading market position, where its 10.4 million tons per year (Mtpy) production capacity accounts for around 72% of the Spanish cement industry.

Growth in these two developed markets more than compensated for weaker sales in Mexico, Venezuela, Egypt and the Philippines. Even an 8% decline in sales revenues and volumes in Cemex's chief market, Mexico, could not stop its 26% overall increase in net sales revenues in the third quarter of 2001 to US$1.76 billion, or the company's 9% increase in EBITDA (earnings before interest, tax, depreciation and amortization) to US$562 million.

With the accelerated recession in its chief markets following the Sept. 11 terror attacks, Cemex announced on Oct. 26 it would lower its forecast EBITDA for 2001 to US$2.2 billion, down from the previous estimate of US$2.4 billion to US$2.5 billion. Cemex's 2000 EBITDA was US$2.03 billion.

Sales volumes were also up in the third quarter, cement sales climbed 22% to 16 million tons (Mt), while readymix products rose 15% to 4.6Mt.

"Given the condition of the markets, it's a pretty good result," says Matt Craze, a Latin American infrastructure analyst at Business News Americas. "It (Cemex) has managed to stay profitable despite increased energy costs at home and weaker markets."

WORKING SMARTER

Cemex is looking to take advantage of its dominant presence in Mexico by harnessing its 3,000 points of distribution to the Internet. At the start of October, it launched the construction materials website Arkio.com through its e-business subsidiary CxNetworks. With an initial investment of almost US$25 million, CxNetworks offered some 20,000 different products. It plans to recuperate that amount by the end of the first semester next year, and by late 2002 expects to have brought in US$45 million in sales revenues, says CxNetworks CEO Juan Pablo San Agustin.

"Cemex uses the Internet in a very professional way," Craze says. "It uses it to enhance its already imposing physical presence in Mexico, and helps it to generate sales, as well as cut logistical costs."

Cemex has been among the vanguard of Mexican companies in developing Internet and e-business tools. The advantages of improved logistics and an extensive supply network are obvious for a company in the cement business, where transport and handling can make up a large portion of overall production and sale costs, explains company CFO Rodrigo Trevino.

Synergies and cost-saving achieved by eliminating overlaps between divisions, such as the absorption of Southdown into Cemex's existing U.S. operations, are also high priorities for the company, Trevino adds. Cemex expects to slash US$100 million from operating costs in the United States by 2003 through such initiatives.

Transport costs within Mexico are also kept down by Cemex's large network of production units, with 15 cement plants around the country. Being such a low unit-value item, cement is not traditionally transported long distances from its point of manufacture, unlike other, more valuable building materials or mineral products. Nor does Cemex export a great deal from Mexico, eliminating transport costs from the plants to the ports. Cemex has also benefited from lower interest rates, as more than 80% of aggregate debt is at floating rates, which have declined steadily over 2001.

"In general, times of weakness in our operations coincide with periods of low interest rates and vice versa," Trevino explains, "We shifted towards floating interest rates a couple of years ago because we anticipated a lower-rate environment. Now we will begin to look for opportunities to shift some of that into fixed-rate interest. This will allow us to continue to reduce our cost of financing."

So far this year, Cemex has been able to reduce its corporate debt by US$870 million, as well as re-schedule a further US$2.2 billion in short-term debt. This has extended the payback times for Cemex and strengthened its financial flexibility, a company source said.

ASIA EXPANSIONS

Cemex's plans to increase its investments in Asia have been thwarted over the past few months. The company's US$300 million offer for a 73% holding in Thailand's PTI Polene cement company looks likely to be bettered by rival international cement firm Holcim, and its offer to purchase an additional 51% of Indonesia's PT Semen Gresik (where Cemex already holds 25%) fell through when the Indonesian government declined to sell.

However, Cemex is still keen on increasing its presence in Asia, a dynamic and growing cement market which at the moment represents only 3% of the company's total EBITDA, Trevino says.

Cemex's aspirations to invest in Asia, especially South East Asia, are part of its strategy to achieve a global presence, which should give it some protection against region-specific downturns, Trevino notes.

These counter-cyclical attributes are important in building an effective diversification strategy for a global player like Cemex if it wants to achieve consistent growth year-in, year-out, he explains.

While Asia's cement industry has been volatile in recent months, it is "attractive in the long-term," Trevino says, "(and) we believe that in the aggregate it can deliver performance with stability."

IMMEDIATE FUTURE

Cemex's growth over 2001, although impressive, has come from acquisitions rather than from previously existing operations. The timing of these acquisitions was important from two chief points of view: firstly, it boosted Cemex's production and sales output in a year which otherwise would have been flat or even negative; secondly, it was achieved at favorable costs and financing conditions.

"This year has been a low-growth year organically (i.e. from existing operations)," Trevino says. "For the second semester we will focus on reducing debt and regaining financial flexibility (which was temporarily compromised with the large Southdown acquisition)."

Apart from some possible purchases in South East Asia and a production expansion in the Dominican Republic, Cemex has no immediate plans for acquisitions in the coming year, and is looking to pay off existing debts quickly while controlling costs in what is expected to be a slow year. Cemex won't expand just for expansion's sake: it is the third-largest cement producer in the world and doesn't sense that it is at a size disadvantage relative to its global peers, Trevino explains, adding that growth was necessary even so in order to be able to deliver good performances year after year.

The company plans to continue playing a major role in the ongoing consolidation of the global cement industry, a company source said. Further consolidation is expected in coming years.

Prices are expected to remain stable over the rest of this year and the next, or may come down if the decline in demand is worse than initially expected. Cemex may even initiate a decrease in prices if it can reduce costs and maintain margins and return on capital, Trevino says.

Despite the Sept. 11 attacks in the United States, Cemex is still upbeat about sales prospects in that market for 2002. Residential construction has been robust, benefiting from low interest rates, and there is currently a surge in highway construction and repair following the new Transportation Act.

Future growth in the United States is important for Cemex's growth prospects in the near future because the outlook for the Mexican and Central American cement markets is weak for the coming year according to Business News America's Craze.

However, new opportunities may be coming up in the Caribbean, with both Puerto Rico and the Dominican Republic announcing some large-scale public works, including highway construction, Craze says. Puerto Rico alone has announced plans for US$810 million worth of federal concessions in 2002.

Cemex looks like it will be well poised at the close of 2001 to endure the lean times in the Mexican market many are predicting, while having the presence, flexibility and capital to take advantage of any opportunities that may come its way.

Dean Ilott is Mexico City bureau chief for Business News Americas.

Telmex

Mexico's telecom giant shows no signs of letting up in times of economic turmoil

Camila Castellanos

Despite gloomy forecasts for Mexico's economy this year, the urge to reach out and touch someone at a time of economic crisis seems to be holding strong for the region's premier blue-chip stock, Telefonos de Mexico (Telmex). Although the downward spiral being experienced by the United States has somewhat squeezed international traffic for the telecom powerhouse, Telmex officials maintain that the company will hold strong and shrug off the tug of the sinking economy with prudent spending and smart sector strategies.

Telecommunications companies worldwide have been hurting due to cutthroat competition and a slowdown in spending on luxury items such as high-speed Internet and secondary lines. But Telmex has boasted of being wise, using cost controls to boost operating profits and offset squeezed margins.

"In an increasingly difficult environment we are competing successfully against global competition," said Telmex CEO Jaime Chico Pardo during a recent meeting with analysts at Goldman Sachs. "The company is well-positioned to weather the storm and take advantage of opportunities that may arise."

Telmex beat most analysts' forecasts in the third quarter, ringing up operating profits of over 11 billion pesos, and seeing EBITDA (earnings before interest, tax, depreciation and amortization) growth up by 5.6%. Meanwhile, the company's total operating costs fell by 1.1% compared to the same period in 2000, and administrative and general costs fell by 18.2%.

"Telmex is still king," says Jose Luis Ramirez, telecommunications analyst for IXE brokerage in Mexico City. "The company's strategy of increasing subscriber growth and volumes, while offering better and integral services, has proven to work."

But third quarter international long-distance sales showed signs of sluggishness, due mainly to fewer calls entering Mexico from the United States, which has been exasperated by the lower tariffs U.S. phone services now pay to connect calls into Mexico.

Yet analysts say the 28% drop in international long distance during the third quarter was widely anticipated, as the company prepared investors for a natural slowdown reflecting Mexico's intense dependence on exports to the United States, where nearly 80% of all exports are directed. The company is also very likely to hurt in the fourth quarter from companies and residents defaulting on telephone bills as small businesses continue to fold-victims of consumer-spending cutbacks.

THE MAKING OF A MONOLITH

A former state-owned monopoly, Telmex was privatized a decade ago and sold to business magnate Carlos Slim, who has since turned the company into Latin America's largest publicly traded company and Mexico's leading provider of local and long-distance telephone services, as well as Internet access and data services. An international shaker, Telmex boasts telecom holdings in countries ranging from Argentina and Brazil to Guatemala, Ecuador and the United States.

Slim is the wealthiest person in Latin America according to Forbes magazine, which estimated his fortune at some US$10.8 billion earlier this year. He also controls America Movil--Latin America's largest wireless telecommunications company. His other businesses range from tobacco interests and copper cables to mining, retail and bakeries. He also controls CompUSA, the biggest computer retailer in the United States.

Slim recently told journalists that Telmex had managed to successfully confront the economic slowdown for nearly the entire year due to its strong balance sheet. While the company will likely reevaluate its investments for the beginning of 2002, he said Telmex will carry through its original investment plans for 2001, budgeted for some US$1.9 billion.

Slim also made note of the sagging profits seen by telecom companies worldwide, as lower demand for services has exasperated debt loads for new technology services that have not earned their potential.

Mexico continues to have low penetration of fixed lines throughout the country, with some 12.5 lines per 100 habitants, compared to penetration of 70 lines in the United States and 20 lines in Argentina, according to information from Mexico's telecom regulatory body Cofetel. Currently, Telmex has some 12.4 million telephone lines in service and 1,141 lines for data transmissions.

"Telmex remains well-positioned financially and technologically to win over this market. We believe the total services that Telmex offers have grown at a rate of nearly 4% of GDP, and we see the company maintaining that tendency despite the economic downturn," IXE's Ramirez says.

Telmex also has other undisputed advantages--as the dominant telephone service provider in every sector, competitors have long argued that Telmex continues to enjoy monopolistic powers and uses bully tactics such as pricefixing to help squeeze out market newcomers. Telmex avidly denies such charges, and in the past, Slim has even gleefully boasted the company's monolithic power, saying that the government's regulations fully allow for Telmex's prowess.

"If they want to regulate us they should change the regulations and do it legally," Slim was once quoted as saying.

Since that time, Mexico's telecom market has fully opened in local, long-distance, cellular and fixed-line sectors, and the nation's telecom regulatory body Cofetel has applied restrictions on Telmex to prevent price gouging and unfair trade practices.

FOREVER ON TOP?

Most new players have had to face harsh investment realities. The nation's sprawling terrain requires millions of miles of expensive optic wire, and most of those unconnected belong to some of Mexico's poorest communities, seen as largely unprofitable.

Big-money investments are also sorely lacking in the sector, as foreign companies in Mexico are limited to 49% ownership in fixed-line telephone companies. This, however, may soon change as Mexican lawmakers prepare to draft a new telecommunications law that would allow for broader foreign investment.

But for now, analysts say, Telmex is in no danger of losing its stronghold. In fact, most are holding the company with a "buy" rating, saying that stock is trading at big discounts considering the market's recent meltdown.

ABN Amro telecom analyst Felix Boni says that despite concerns that Telmex will be hit harder by falling long-distance revenues and squeezed margins, it is also seen earning big money with the rapid growth of other businesses such as data transmissions and "calling-party-pays" billing schemes.

"We see the stock as undervalued relative to its growth potential, free cash-flow generation, strong balance sheet and its peers in other markets," he says.

Telmex officials say they are prepared for what lies ahead, having already strengthened data service technologies and publicity strategies to keep winning market share.

"In the near future, we expect rates to be stable, modest traffic growth and advanced services for those who are less affected by the downturn of the economy," Chico Pardo said in the Goldman Sachs meeting.

He also counts on data services to be a strong turning point for the company. Telmex officials have told local press that since Sept. 11, demand for videoconferencing has increased some 100% as businesses are more wary of sending employees by plane. "Data services represent our potential for future growth," Chico Pardo said. "Consumers want broadband access. We have invested in technology to ensure a multiple access strategy."

Boni says he also predicts that Telmex will forge ahead in its plan to use excess cash to pay dividends and buy back stock, while other analysts have hinted that Telmex may use the economy's downturn to buy up market stragglers and look to investment opportunities abroad. Long known as the "Midas Man" for turning tarnished businesses into gold, Slim is not likely to lose his vision in a time of crisis, analysts say.

Camila Castellanos is a Mexico City-based freelance writer.

Bachoco

In the face of imminent Nafta aperture, Mexico's No. 1 egg and poultry producer is standing firm

Andrew Watson

What could be more straightforward than a billboard advertisement for Bachoco chicken products?

"A proudly Mexican chicken," proclaims a cocksure white hen to passing cars on Mexico City's Periferico, the capital's congested beltway that carries hundreds of thousands of commuters to and from work every day.

But the simplicity of the ad belies. the complexity of maintaining a leadership position in one of Mexico's most hotly contested markets. Indeed, next year promises to be one of the most challenging in the career of recently appointed Industrias Bachoco CEO Cristobal Mondragon Fragoso. The company, the nation's largest egg and poultry producer, faces a detrimental change in its tax regime and greater competition as Nafta partially opens the barriers to the poultry trade between the United States and Mexico.

Affordable chicken and eggs are the most popular source of protein in Mexico and chicken products make up more than 80% of Bachoco's net sales. On Jan. 1, 2002, the free-trade agreement reduces the duty on imported chicken from the current 98% tariff to 49% and then to zero the year after. Anticipating that change, Bachoco's chief Mexican competitor, Pilgrim's Pride, says it is planning to import large quantities of cheap U.S. chicken cuts.

In addition to facing stepped-up competition, analysts say the company is vulnerable to losing its simplified tax regime and that a 15% value-added tax (IVA) the government of President Vicente Fox is proposing to levy on currently exempt food items would likely damage Bachoco's sales. The poultry producer has benefited for many years from a tax system applied to companies dedicated to agricultural activities with no more than 10% of their sales in processed foods. The revenue-starved administration is looking to close down that privilege, says Grupo Financiero Banamex analyst Ana Maria Mireles.

SHAKING IN THEIR SHELLS?

In his interview with BUSINESS MEXICO, however, CEO Cristobal Mondragon wouldn't speculate on the effect of the possible tax changes on the company's bottom line. Mondragon, who was appointed chief executive in July after more than 10 years of holding the position of chief financial officer, did, however, say the company is fully prepared for Nafta's liberalization.

"The only problem with the liberalization (of chicken) is the serious difference that exists with grains and corns." Mondragon explains that because feeding acounts for 60% of Bachoco's production costs, the annulment of chicken import duties before those of grains and corn will place local producers at a disadvatage against North American competitors. So Bachoco has sought to strengthen its market position through brand recognition, innovative products, internal improvements in management, productivity and distribution, while at the same time acquiring other producers.

Although founded 50 years ago by the Robinson Bours family, the Bachoco enterprise only began to move out of its home territory in the northwestern states of Sonora and Sinaloa-to become a nationwide concern in the 1990s. In 1991, Bachoco started operations in the city of Celaya, in the nation's north-central state of Guanajuato, a location favored for its closeness to key markets in Mexico City. Company headquarters were moved to Celaya in 1992. It extended market coverage through the acquisition of a complex in Tecamachalco, Puebla in 1993. Bachoco then bought facilities in Lagos de Moreno, Jalisco to bolster the company's presence in central and western Mexico, and to reinforce operations in Celaya.

Cementing together that expansion strategy was an initial public share offering on the Mexican Bolsa and the New York Stock Exchange in September 1997.

"Our (share) issue in 1997 provided us with the capital to invest in new products, new technologies and to strengthen quality control," says Mondragon.

The company achieved a full nationwide presence in December 1999 when it acquired No. 4 poultry producer Campi from conglomerate Grupo Desc. Based in the southern state of Yucatan, Campi is also a leading supplier of balanced feeds to the poultry industry and "provides synergy" with Bachoco's chicken breeding business, Mondragon says.

In 2001, Bachoco spent almost US$15 million on the incorporation of three more companies (Avicola Cotaxtla, Avicola Nochistongo and Avicola Simon Bolivar) to expand its share of the egg market to 8%.

And the company isn't stopping there: "We remain attentive to the possibility of making further acquisitions," Mondragon says.

COCKS FIGHTING FOR POSITION

Production growth has given Bachoco a favorable position compared to other producers, "but it doesn't shield it from the effect of price fluctuations in its products which repeatedly exert downward pressure on (profit) margins," says Grupo Financiero Banamex's Mireles. "There is an oversupply of chicken. The market is fragmented, with many small producers.

The four large companies (Industrias Bachoco S.A., Pilgrim's Pride Corp., Tyson Foods Inc. and Productos Agropecuarios de Tehuacan S.A.) produce half of all Mexico's chicken; a multitude of small farms produces the rest. With so many competitors providing near-identical products, the nation's chicken farmers are what economists call "price-takers," meaning they have little choice but to accept the asking price for their product in the market place.

The competition is set to get stiffer as time counts down to the elimination of trade barriers in 2003. Lowering of duties will make the importation of inexpensive chicken cuts for sale "cost effective" Pilgrim's Pride says. The U.S. company, which has invested more than US$180 million since 1988 to become Mexico's No. 2 producer with a 14% market share, plans to import large quantities of the cheaper chicken legs and thighs for sale to supermarkets and restaurants. Because the U.S. consumer prefers chicken breast, "leg and thigh sells (in the United States) at the cost of production or lower," Pilgrim's special adviser David Goldstein told the El Financiero newspaper. The company hasn't indicated whether it will start to import next year or when duties are abolished in 2003.

SET TO ROOST

Mondragon believes his rivals aren't all they're cracked up to be: "Our presentations already compete effectively (with Pilgrim's and Tyson leg and thigh products) in (the border cities of) Tijuana, Mexicali and Ciudad Juarez. Mexican consumers like our products because of the pigmentation of the chicken and its freshness."

Nor does he view the variability of chicken prices as especially problematic.

"Poultry and meat farming is a cyclical industry," Mondragon says, noting that demand is usually weak in the third quarter but that sales in the final three months of the year pick up as consumers stock up for Christmas. "Our financial solidity acts as a hedge against price sensitivity."

Although it has traditionally focused on the domestic market, Bachoco sees Nafta as an opportunity to sell to the United States. "Yes, we're thinking of exporting (chicken breast and eggs) from our facilities in the northwestern states and the Yucatan peninsula," the chief executive says.

To become more responsive to the fluctuating demand for its products, Bachoco has spent more than US$6 million on information technology. The project, called Bachoco Information Technology (BIT), is based on the Enterprise Resource Planning system (ERP) pioneered by German software giant SAP. BIT will provide real-time data on inventory levels at Bachoco's six production plants and 57 distribution centers and will allow better coordination with suppliers and retail outlets.

"Hewlett Packard Consulting helped us set up the first phase in record time," says Mondragon.

With such innovative approaches in a traditional industry, Bachoco has laid the foundation for the next 50 years. As for the new chief executive, he feels "fortunate to have the full backing of a very capable team."

Andrew Watson is a Mexico City-based freelance writer.

Grupo Modelo

Success keeps brewing with a winning record

Tom Dieusaert

Although Modelo ranks only 20th on the list of the country's exporters, it is without a doubt the best known Mexican company in the world. True, an American consumer is more likely to be acquainted with a cool bottle of Corona, Modelo's premium beer, than say, a bag of local cement. But there's more to the brewer's success: Modelo has successfully marketed and projected the image that foreigners have of Mexico: palm-lined beaches, no hurry, a taste for good food and drink and a certain rustic austerity--the recipe to success, according to CEO Carlos Fernandez and analysts.

Modelo has become big, very big. By the end of September 2001, the Mexican brewer had posted sales of 24 billion pesos. Compared to year 2000, sales were up by 4.6% and although the growth was not as spectacular as last year (during 2000, Modelo's sales increased by 9.75%, in times where all companies were cutting staff and reducing production). Moreover, Modelo opened up it's state-of-the-art brewery in Zacatecas, churning out 20 million hectoliters annually, the biggest and most modern beer factory in Latin America. But outside the continent Modelo is also flying high: It exports to more than 150 countries, and in the United States, Modelo's premium beer Corona still ranks as the No.1 imported beer, a position it holds since 1999 when it displaced Heineken.

Modelo was founded in 1925 and now has 10 different brands, featuring Corona Extra, Modelo Especial, Victoria, Pacifico, Negra Modelo, as well as a few local brands. The brewer has an installed capacity of more than 46 million hectoliters.

Apart from a limited 10% of free-float on the Mexican stock exchange (BMV), most of Modelo's shares are controlled by a small group of shareholders, among them Anheuser Busch, with 35%.

LOOKING BACK

CEO Carlos Fernandez distinguishes different key moments in the history of Modelo: "From the start, our founder Don Pablo Diez started the expansion of the company through investments and take-overs of other breweries, malt producers and through strategic alliances to secure the supply of raw materials."

Fernandez distinguishes other important moments, like the IPO on the Mexican Bolsa in 1994 and a contract in 1993 with Anheuser-Busch, which made Modelo the importer of Budweiser and Bud Light in Mexico. Since Fernandez was named general director in 1997 his aim has been "to start a new period of expansion, based on total quality, to make Grupo Modelo the first brewer on a global level."

In spite of Modelo's reputation as an exporter, the brewer has laid the foundation of its success at home: "A key moment was 1986," says Banacci analyst Adriana Neriga who follows the Mexican retail and food industry closely. "Modelo then overtook Femsa as Mexico's biggest brewer and has gained more market share since."

Modelo now holds more than 56.1% of the national market, while the Cuauhtemoc-Moctezuma brewery branch of Femsa holds 43.9%.

Not that the Monterrey-based Femsa is a lightweight itself. On the contrary, Femsa actually posts higher sales than Modelo, due especially to its successful Coke bottling branch. However, the diversity of Femsa activities also weighs on Modelo's only competitor.

"The main shareholders of Femsa, the Garza Laguera family, heavily indebted the company to buy Bancomer in 1982," says Neriga. "Femsa now still holds a debt of US$1 billion. Modelo is almost debt-free, which gives the company more maneuvering space when it comes to investments. Modelo has invested more than US$1.4 billion in expanding its production capacity. Now it has 48% more capacity than its competitor, which gives the company leverage for an increasing future demand."

But Modelo beats its main competitor as an exporter too. While Femsa exported 1.8 million hectoliters last year as an exporter, Modelo shipped 8.6 million hectoliters of beer out of Mexico. For Modelo, exports account for 20% of volume and revenues, as opposed to Femsa, where exports represented 6% of revenues.

"Modelo has successfully built its marketing strategy around one premium brand--Corona," says Neriga. "Femsa, on the contrary, has promoted different brands like Tecate, Sol and Dos Equis, simultaneously, which gave rise to brand cannibalism, where one brand was growing at the expense of another. This situation has been corrected, but Modelo is still much more identified with one successful beer."

The success of Corona has placed Modelo in a quite different market niche than other imported beers in the United States. Corona seems to have replaced luxury Scandinavian lagers like Carlsberg and Tuborg, which were popular in the eighties. "Corona is a premium beer associated with status," says ABN Amro's analyst Laura Ramos. "While Femsa sells its beers among the Mexican-American community, Corona is widely accepted by Anglo-Americans."

THE SECRET TO SUCCESS

CEO Fernandez says its success is not due the original presentation, the price, the taste or a smart marketing campaign. It's all of these things put together.

"The market is very sensitive when it comes to quality," says Fernandez. "If Corona weren't different from any other beer, it would not be the leader in the market and competing with American beers, which are cheaper in the United States than Corona. As for marketing, I insist that Grupo Modelo always builds its publicity campaign on reality, like the quality of its products and the relation with our country, Mexico and its natural beauty."

There are some black clouds on the horizon, however. The results so far for 2001 have been encouraging but not as good as last year. While the home market is likely to slow down because of the projected 0% growth of gross domestic product, the export markets--where Modelo is more active than Femsa--look even grimmer.

The United States is struggling with a recession, and in Europe, Modelo does not seem to be gaining a significant market share. Mexican brewers capture barely 2% of the European market.

Various factors like a weak euro against the dollar, distribution monopolies for local brewers, confusing community and local regulations, and the success of imitators like the French Desperado beer, do not aid their chances.

But more structurally, the very images of Corona that make it popular in hip bars and dance clubs causes a problem when it comes to attaining high volumes on the long term. In popular pubs for instance, Corona can hardly compete with other local lagers, which are sold as draft beers and are significantly cheaper. In Belgium, where 55% of Modelo's products enter the European market, a local draft lager costs about 60 francs (US$1.30), whereas a Corona adds up to 135 francs or US$3. Nor does Corona (or its darker version Negra Modelo) compete with heavy flavored ales and abbey style beers, preferred by the locals.

"Many European countries have a long and deep rooted tradition of elaboration and beer consumption," says Carlos Fernandez. "Moreover, in Europe they are much more proud and chauvinistic when it comes to consuming their beer."

"However, for a quality product like Corona, nothing is impossible. I still remember people saying it was impossible to displace the No. 1 imported beer in the U.S., a Dutch beer with more than 60 years of presence on the market."

Fernandez does not consider the conquest of the European market to be "indispensable" for growth. "Although our international expansion plans are very aggressive, our principle market is still the domestic one," he says.

GREAT EXPECTATIONS

Banacci's Neriga remains bullish about Modelo: "Although beer consumption is very much linked to the growth of the economy and the wages, it is also a defensive sector. The food and beverage sector barely suffers from major crises, since that's what people will spend on first."

She also signaled that Mexico is not a mature market like Europe or the United States. "Last year beer consumption in Mexico increased by 4%; this year the increase will be around 3% in volume. Mexico has a very young population, so beer consumption is likely to grow as the adult population increases in size," she says.

Also, BBV-Bancomer analyst Ivonne Ochoa believes Modelo will have a good year in 2002.

"The company is in a stable, defensive market niche. The prospects for GDP growth next year are of 2%. Modelo's sales should not only keep in pace with economic growth, I foresee them gaining more market share at the expense of Femsa."

Ochoa specifies how Femsa is restructuring its beer branch, innovating their electronic systems, installing refrigerators and initiating a pre-sales system (a-just-in-time delivery system). "The new strategy will boost Femsa's sales in the future, but next year they will have to concentrate on their in-house policies."

Also Carlos Fernandez is optimistic about the future, in spite of the current political and economic climate. "Nobody can ignore the tragic events of Sept. 11--we'll be watching the evolution of foreign and domestic markets closely. But we're not going to change our strategy. Investments will go on as planned: US$350 million dollars for this year."

Tom Dieusaert is a Mexico City-based freelance writer.

Walmex

With little to fear from recession, Walmex stays on top with strong strategies

Paul Day

Wal-Mart de Mexico, otherwise known as Walmex, has refused to allow mounting economic woes to dampen its expansion plans. In fact, the well-known retail colossus says it positively thrives when customers start to tighten their purse strings.

"Walmex sees a recession as an opportunity to grow," says Mercedes Aragones, the company's vice president of Corporate Public Relations. "Prices in Walmex are lower, and those with financial problems always come directly to our stores. We always capture a greater clientele in slow economies."

Walmex does not just include Wal-Mart, but a cluster of popular Mexican household retail names ranging from economy stores to fashionable clothes boutiques and even restaurants. They operate 527 commercial units in Mexico: 242 self-service supermarkets, 54 department stores and 231 restaurants.

Familiar names include Sam's Club, Bodega Aurrera, Superama, Vips, Suburbia, El Porton, Ragazzi and of course Wal-Mart Supercenters.

ENTER THE EMPIRE

Wal-Mart first came to Mexico when it merged with Cifra in 1991. Cifra has a longer history in Mexico, beginning in 1958 as Aurrera which was opened by the Arango brothers, who aimed for a supermarket philosophy of selling at knockdown prices and operating their business at zero debt. They originally borrowed 3 million pesos from their father, paid him off in a year, and swore never to go into debt again. This down-to-business attitude is what caught the eyes of Wal-Mart when it first began to look at Mexico.

While Cifra was always a strong participant in the Mexican retail market, it has been Wal-Mart's goal of constant growth that has put the chain of companies on the investor's map. This especially applies as many companies are feeling the brunt of a shrinking economy and world uncertainty in the wake of the terrorist attacks in the United States.

Considering that Wal-Mart thrives on a weakened economy when customers are prepared to walk those extra blocks to save a few pesos, this year has been a boom. Sales climbed a steady 15% year-on-year during the first three quarters of the year and rung in at a healthy 60 billion pesos.

Third-quarter results show that Walmex growth has not been even slightly affected by the revelation that the government isn't likely to reach its original gross domestic product (GDP) goal of 4.5% but is probably going to end the year completely flat, if not negative.

The company's latest financial results show a 14% growth in sales compared to the same period last year, clocking in at 20.4 billion pesos. Net profits have also shown a solid increase at 21.2% for the third quarter and 20% for the first nine months of 2001, compared to the same periods in 2000.

It is possible to gauge the enormous presence the company has made for itself by comparing its third-quarter sales with that of its three main competitors. Comerci saw net sales fall 2.5% to 8.71 billion pesos and is by far having the worst year among Mexico's supermarket chains. Gigante, on the other hand, saw sales increase slightly by 2% to 7.04 billion and Soriana showed the largest increase of the three, up by 13.8% to 7.06 billion pesos.

While Soriana is most certainly growing in the market, its total sales are still dwarfed by the cash Walmex raked in over this quarter.

Not surprisingly, Bolsa analysts have placed the company firmly on their buy lists in Mexico.

"The company reported what, in our view, will be the highest EBITDA (Earnings before interest, tax, depreciation and amortization) growth within the Mexican retail sector with an increase of 19.5% during the third quarter of 2001," says the brokerage firm Finamex. "Below the line, even though lower interest rates didn't help financial gains, there was an 82% improvement in other financial operations. We reiterate our buy recommendation on this stock."

Walmex's stock accounts for 9.61% of the Mexican IPC index, the largest within the market, and stock prices have risen almost 12% this year compared to the market's overall growth of 4.89%.

AN EVERY DAY GOOD STRATEGY

The company's unprecedented growth in hard times is a reflection of impressive money-saving schemes they employ to keep product prices low and customers happy.

People come back, not only out of concern for their household budget, but also because, once shopping there, they realize that Walmex isn't cheap because it sells low quality goods, but because it consistently undercuts the competition on well-known brand names.

Part of Walmex's success has come from a "Precios Bajos Todos Los Dias" or "Every Day Low Prices" policy, thus doing away with the seasonal and selective special offer strategies of most supermarkets.

This was originally considered a risk in Mexico--a country whose people love to hunt down bargains.

"We really didn't know how it would catch on, as Mexicans like to seek out those seasonal offers," says Aragones. "It was introduced first outside of Mexico City as a test and was so successful that it has been introduced across the country."

LOGICAL LOGISTICS

But the feather in Walmex's cap has been how they manage their distribution logistics.

"Their central distribution network is revolutionary, and means they can offer consistently low prices," says analyst Mauricio Brocado from IXE brokerage in Mexico City.

The system involves a single Walmex distribution warehouse to which all produce is taken and then sent out to the various stores. By centralizing the system, multiple trips from different warehouses are cut down so both Walmex and their various providers can save money. This saving is passed on to the customer.

The system has won logistics awards for excellence and the new center to be opened in Mexico City in December will be one of the largest of its kind in Latin America.

Increasing efficiency is central to the company, says Aragones, and it is only through such cost cutting measures that the company can continue to offer low prices.

Walmex also prides itself on helping finance community projects which, while an altruistic gesture, is as much a part of increasing the profit margin as it is helping those in need.

"What's the point of having a nice shop in an area where there is no money? This service is all part of the work principle," says Aragones.

A total of 20 million pesos was donated in 2000, and many stores not only serve as vaccination centers but also function as temporary refuges during natural disasters.

FUTURE'S SO BRIGHT

Walmex has no intention of slowing its exceptional growth rate.

"Wal-Mart stores, in Mexico as much as in the United States, have always tried to keep a plan of constant growth," says Aragones.

Indeed, during the third quarter, Walmex opened 11 more stores throughout Mexico, and has plans to open no less than 17 stores and 10 restaurants in the fourth quarter.

Installed capacity has grown an impressive 294% from 567,483 square meters in 1991 to over a million and a half in 2000.

The company aims to grow at a steady 16% a year until there is a Wal-Mart store in every Mexican town with over 80,000 inhabitants, or placed so that over 80,000 people are within a short trip away.

Only 30 cities remain, Aragones says, so if the company manages to keep to its growth goals there will most certainly be a store near you, wherever you are in Mexico, within just five years' time.

Paul Day is a Mexico City-based freelance writer.

America Movil

Mexico's mobile phone leader forges ahead in the face of increased competition

Camila Castellanos

With competition heating up throughout Latin America's telecommunications industry, Mexico's international player America Movil (AMX) has poised itself to be the leader in the region's booming mobile telephone era. Strong cash-flow generation, negligible refinancing risks and a future of promising earnings prospects have cemented the mobile telecommunications provider to a solid future, despite pressures from the slowing global economy, analysts say.

"America Movil continues to surprise on the upside," says Whitney Johnson, Latin America telecom and media analyst at Merrill Lynch, following the company's better-than-expected third quarter results.

Spun off from Mexican phone giant Telefonos de Mexico last year, America Movil began trading on the stock markets in Mexico, New York and Spain in February 2001. Since then, AMX has racked up investors worldwide and continues to lead the top stock picks of nearly every brokerage house recommendation list.

America Movil holds more than a dozen mobile phone and broadband companies throughout the Americas, including wireless divisions in Mexico, Guatemala, Ecuador, the United States, Brazil, Colombia and Puerto Rico.

"All our subsidiaries had strong operating performances," America Movil said in its third quarter earnings report. "All the consolidated subsidiaries experienced double-digit subscriber growth rates in the quarter."

The company's third-quarter performance did largely defy the economic downturn, analysts say.

The company's total wireless subscriber base increased by 2.5 million to total 23.8 million customers. Meanwhile, its third quarter EBITDA (earnings before interest, tax, depreciation and amortization) figure more than doubled over the previous year, coming in at 3.4 billion pesos, with a margin of growth of 21% compared to the same period a year ago and 29.2% compared to the second quarter last year.

"The company's most recent third-quarter performance showed no real signs of a slowdown," offering one of the highest EBITDA growth opportunities in global wireless, according to a report by Spanish banking group BBVA.

But the company could begin to feel the pinch of the slowing economy, other analysts say.

"While subscriber growth remains stronger than ever, sharper declining ARPUs (average revenue per user) suggest that the incremental user is generating lower network traffic than estimated," Johnson notes.

Yet the company's total costs and expenses in the quarter have been well-managed, with overall financing costs down 400 million pesos from the second quarter. Net revenue reached 10.4 billion pesos, up 51% from the previous quarter, bringing the total in the nine-month period to 30.1 billion pesos.

Brazil operations added a total of 221,000 new subscribers, while the combined EBITDA for the four wireless affiliates grew 15% compared with the second quarter of this year.

Other important moves for America Movil include the completion of its funding program for the year, having raised a total of 17.6 billion pesos in new debt. Approximately 8.4 million pesos will be directed to the amortization of old obligations and other debts in 2001.

"The increase in net debt is explained essentially by the purchase of a 41% stake in ATL (Brazilian wireless provider Algar Telecom Leste) from Williams Communications; capital contributions to Telecom Americas and stock repurchases," the company said in its earnings statement.

Yet some analysts say the mounting debt load could be seen as detrimental in the near future.

"When accounting for non-consolidated net debt, valuations for America Movil deteriorate meaningfully," said BBVA in its research note, adding that heavy equity income losses from foreign holdings could severely depress earnings during the next year.

The company's U.S. prepaid wireless division, Tracfone, also continues to concern some investors, as the competition in the United States has proven stiffer with continuing mergers among telecom giants.

"We continue to view Tracfone as the single most important source of risk to our AMX estimates and with such high churn, its value is reduced considerably even if it were sold to a facilities-based operator," Johnson said in a recent report.

TELCEL MUSCLE

America Movil's largest and most profitable division, Mexican cellular phone company Telcel, showed its best quarterly performance ever. The company added 1.8 million subscribers, up 13.6% year-on-year subscriber growth at the end of September.

"It must be noted that although most of the new subscribers are for pre-paid subscriptions, an important increase in post--paid subscribers took place--the largest quarterly addition this year," America Movil said.

In operation since 1989, Telcel offers voice and data services, and is the only carrier with nationwide coverage and automatic roaming in Mexico. The company continues to hold the No. 1 spot in wireless operations, with 13.2 million customers and 70% market share.

Telcel also continues to build on data technology services, including anew telemetry messaging service throughout Mexico, which company officials have said will be the turning point in earnings when the economy shows signs of recovery.

Telcel's market dominance is expected to hold strong for the remainder of this year and for 2002, as the company has said it will receive investments of some US$1.1 billion from its parent company America Movil.

At the time of print, Telcel officials say that the company's plan to place a market bond offer for US$500 million is still in the works, and will likely happen as soon as market conditions show some signs of improvement.

GROWING COMPETITION

In a climate previously dominated by state-owned telecom companies and later by questionable licensing practices, America Movil has quickly positioned itself in Latin America to remain the region's leading wireless service provider, analysts say. In Mexico in particular, Telcel is not seen losing market share any time soon, meaning that the hefty profits will keep coming in for America Movil despite thicker competition.

"Mexico is completely open to healthy competition in the wireless arena even if Telcel and Telmex continue to dominate," says Patrick Grenham, telecommunications analyst for Salomon Smith Barney. "The opportunities are open and fair, ready for newcomers with the right strategies."

Mexico telecom officials have boasted of the improvements made to users since the "calling party pays" billing method was adopted in 2000 in Mexico.

"The mobile cellular service has seen impressive growth due to the discounts and payment plans," said Jorge Nicolin, president of Mexico's telecommunications regulatory body Cofetel, during a recent presentation.

He noted that quality issues and system problems in the industry, such as inadequate roaming and calls that are dropped due to system saturations, are normal in any developing industry.

"That is not a problem exclusive to Mexico," he said. "But to reduce the deficiencies in service, Cofetel has imposed a firm agreement between mobile phone operators to resolve the problems of quality in their networks."

Mexico's second-place wireless telephone company, Grupo Iusacell, was one of the first to enter in force in the mobile phone arena. The company has some 1.62 million clients, and offers coverage to about 81% of the country's population. The company, majority owned by communications powerhouse Verizon Wireless, says it is centralizing and expanding operations throughout the country despite a capital squeeze.

Yet the economy's downturn will likely hurt Iusacell's immediate growth plans, analysts say.

"The company's growth and increasing presence is something that will obviously take time and will likely continue to show weak results in the short term," says telecommunications analyst Jose Luis Ramirez, of IXE brokerage in Mexico City.

Other companies currently fighting for a piece of the pie include wireless newcomers Pegaso and Unefon, who are focusing on competitive coverage in Mexico's most profitable cities by offering lower rates and payment plans. Spain's Telefonica Movil has also recently charged into the race, although the company is focusing on wireless data services in Mexico for the moment. Unefon, owned by Mexican media mogul Ricardo Salinas Pliego, currently has 628,000 subscribers.

New auctions for wireless licenses throughout the country may help those companies expand their network coverage and gain more recognition, Ramirez says.

"It's difficult to estimate the time-frame of when those companies will be well-placed with licenses and complete networks to heartily compete with Telcel," Ramirez says. "The struggling economic situation certainly doesn't help, but the door is opening to possibilities, although they will likely face pressure to find partners or additional capital."

He added that America Movil is seen holding its own.

"It will maintain its healthy financial position, which will allow it to be flexible in confronting capital needs," Ramirez says.

America Movil officials, meanwhile, have hinted at further investments and acquisitions abroad.

In interviews with local press, Telcel Chief Financial Director Carlos Garcia Moreno Elizondo says investments will remain strong in 2002, and that America Movil will maintain its stronghold, focusing on improving wireless data operations and broadband options throughout the region.

Camila Castellanos is a Mexico City-based freelance writer.

This recession-proof chain keeps its customers loyal through the downturn

Elektra

Josh Tuynman

No matter what happens to the economy in 2002, there will be a million weddings in Mexico, which means family and in-laws will be out buying a million TV sets, a million sofas, a million blenders--it's simply the done thing, says Alvaro Rodriguez Arregui, chief financial officer for Grupo Elektra. And with his company's lock on the Mexican lower-middle class market, it is more than likely that suegros will be buying those TVs at an Elektra store.

It's the well-known key to Elektra's success: more than just a department store, for many Mexicans it is an institution--their only option for banking and credit to furnish their homes.

So for Elektra, a recession is time to relax an aggressive expansion program, hang on to cash, and gain market share from other retailers that don't have such an established customer base.

"We've been here before," says Rodriguez, adding, "and come out even stronger."

THE CORE BUSINESS: CREDIT

Walking into an Elektra store, whether it's in the heart of Mexico City or a small, rural town, would not lead you to expect that you are in a retail powerhouse. Decoration is minimal, with inventory--home electronics, furniture, appliances--stacked against the walls, and few items on display.

But what Elektra stores lack in decor is made up for by their core business: credit sales. Nearly two-thirds of purchases are made on installment plans, usually of39 weekly payments.

Although the interest rates of these plans--over 40%--seem exorbitant by American or European standards, being able to pay in installments is a godsend to Elektra's customer base. With Mexico's repeated banking crises and a Byzantine bankruptcy system, bank credit to consumers in the form of credit cards is limited to the top income brackets. And even though credit card rates have dropped to an average of 40% from 46.5% last year, Elektra's credit remains competitive.

The Elektra credit system pays off in various ways. By offering credit, they don't just attract customers, they create them, selling 5,000-peso televisions to people who otherwise wouldn't be able to buy one. The juicy spread on rates means that nearly 65% of Elektra's revenue comes from interest payments. Just as important, it creates customer loyalty.

"We trusted them (the customers) first, so now they trust us," says Rodriguez.

THE ONLY STORE You NEED

The stacks of blenders and armchairs in an Elektra store hide the fact that it is, for many people, a bank. The "Mi Guardadito" program, inaugurated in 1997, has 1.1 million savings accounts administered in Elektra stores. And again, Elektra fills a need for their customer base that almost no one else can. Most banks require a minimum of 1,000 pesos to open a savings account, whereas the average Guardadito account balance is only 360 pesos.

Since the majority of Elektra customers are, in effect, loan recipients, it was a simple thing to make the jump to consumer banking.

"We can leverage our infrastructure to provide services with a very low margin," says Rodriguez. "The stores have space, cashiers, customers, so the cost of providing services is close to nil."

Money transfers are another financial service that Elektra offers--yet another feature that puts the stores into a category above a mere retailer. Besides charging a hefty commission (which may have to come down as competition increases), Elektra benefits from impulse shopping, as Tio Tono's hard-earned dollars are converted into Gaby's fistful of pesos while she's right there in the store.

With the addition of photo developing and cellular phone sales, Elektra becomes something of an all-in-one store, a format that Mexico City brokerage Valores Finamex retail analyst Jose Alberto Galvan sees as a winner in the country's rural areas.

"Elektra can provide a range of services in a small town that people normally would have to travel a long distance to encounter."

STAYING ON TOP

With the Elektra business strategy being as well-known as it is effective, why hasn't it spawned dozens of imitators? The answer is that other retailers have begun to offer credit as well, but Elektra's vast lead in the race is difficult to overtake. Elektra's database of the credit histories for 5 million customers rivals the national credit bureau in size. A battalion of 3,000 collection agents has established contacts and experience throughout the nation. Advantages such as these have kept competitors, such as the regional Famsa and Coppel chains, from even coming close to Grupo Elektra's total of over 1,000 stores.

And then there's the cash. With US$120 million in its current balance, the company can continue to sell goods now and get paid later without having to incur short-term debt--making the recession "a time of opportunity for us," says Rodriguez. "When you are in such a strong financial position, and most of your competitors aren't, you can be a little bit more aggressive than everybody else."

As the economic slowdown continues, buying on credit will become more important, as customers have less cash on hand to buy their basic household goods.

One of the ways that Elektra is adapting to the slowing economy is by relaxing the time limits for customers to pay. Average weeks for payment should slip from 42 to 44 in 2002, according to retail sector analyst Finamex's Galvan.

But maintaining the cash to be aggressive with customers has come at the cost of playing defensively with its expansion plans. At the beginning of 2001, the company intended to open 150 new stores by year's end. But management scaled back the expansion to only 70 new stores this year, and closed some 50 stores as well, for a total gain of 20 stores to its 1,000-store empire.

But slowing to 2% growth is a far better position to be in than much of its competition. It's biggest competitor, Famsa, is based in northern Mexico, where the recession has hit hardest. And while Elektra stores will continue to be fully stocked, independent retailers may begin looking emptier as they can't afford to stock as much merchandise.

MISSING PAYOFF

Despite owning one of the Mexico's fattest cash cows, Grupo Elektra's share prices have dropped far below historic levels. The company's price-to-earnings ratio hovers at around four to one, less than half the price of market stalwarts such as Wal-Mart de Mexico and Telmex. To explain this, analyst Galvan points out the mistrust that traders have of company management. In 2000, for instance, share prices rose on announcements of a plan to double the sales area (a term meaning not just adding new stores, but expanding on existing stores) within four years--which is now unlikely to happen. And as part of the Ricardo Salinas Pliego business empire, Elektra was involved in a stock option deal for its TVAzteca holdings that appeared, at least, to benefit Salinas to the detriment of Elektra shareholders. Furthermore, Grupo Elektra's ventures outside its core Elektra stores market have not been nearly as successful. The One, a chain of youth-market clothing stores, is in particular trouble, with revenues falling 19% in the second quarter this year.

Under current market conditions, investors have been fleeing to quality, choosing to ride out the storm on defensive stocks. As such, while Elektra was once a definite buy, it has since been downgraded by analysts.

But with new corporate policy to protect minority shareholders and full coffers to maintain a sound financial position, Elektra is well-positioned to ride out the recession. Even in the aftermath of the 1994-95 peso crisis, Galvan notes, Elektra's sound credit and collection policies managed customer delinquency rates "extremely well." And only die-hard pessimists think 2002 will be anywhere as bad as 1995. By catering to Mexicans' basic needs and maintaining tight customer relations, for Elektra, weathering the storm is a matter of merely staying on course.

Josh Tuynman is a Mexico City-based freelance writer.
COPYRIGHT 2001 American Chamber of Commerce of Mexico A.C.
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Copyright 2001, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

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Publication:Business Mexico
Geographic Code:1MEX
Date:Dec 1, 2001
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Previous Article:Bumpy landing: The government's decision to build the new airport in Texcoco has met with controversy. (Spotlight).
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