Emerging Markets Project Heineken in Mexico

Mexico and Heineken

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Course: Emerging Markets IBMEM108R3

Introduction 3 1. PESTLE-Analysis of Mexico 4 1. Political 4 2. Economic 4 3. Social 4 4. Technological 4 5. Legal 4 6. Environmental 5

2. Hofstede-Analysis of Mexico 5 1. Power-distance 5 2. Individualism 5 3. Masculinity 5 4. Uncertainty avoidance 6 5. Long term orientation 6

3. Investment opportunities Mexico 6 1. Tourism 6 2. Value chain 6 3. Selling the premium lager ‘Heineken’ in Mexico 7 4. Chosen strategy 7

4. The future of Mexico 8 1. Short-term 8 2. Medium-term 8 3. Long-term 9

5. Ethnical challenges 9 1. Corruption 9 2. Drugs and crime 10 3. Alcoholism 10

6. How to business in: Mexico! 11

Bibliography: 12
- Internet 12

Appendix: 13
-Geert Hofstede’s Cultural Dimensions 13
-Daily log 14
-Personal logs 17
Introduction

Change is an important issue. It is difficult to adapt to change but in business sometimes there is no other solution. In this report, there will be a closer look on, how you can enter an emerging market. In this report will reveal insights in Mexico as emerging market. Heineken is a well established brand, but can still win a lot of market share in emerging markets. Therefore we will give some guidelines, of how Heineken can enter the Mexican beer market. This is a general overview of the research method conducted:

Is there need for Heineken beer in Mexican market?

To answer this research question, we make use the Cultural Dimensions from Mr. Hofstede and the Pestle analysis founded by Mr. Porter.

An extensive desk research brought us a lot of facts, with the provided information on mostly from the internet and a interview with Mr. Bakker from Heineken conducted by a Dutch student we were able to write this report.

The final goal of this report is to clarify where Heineken could invest and if there is need for premium beer in the Mexican market.
1. PESTLE-Analysis of Mexico

1.1 Political
The politics of Mexico take place in a framework of a federal presidential representative democratic republic whose government is based on a congressional system, where by the president of Mexico is both head of state and head of government, and of a multi-party electoral system. The federal government represents the United Mexican States and is divided into three branches:
1. Executive
2. Legislative
3. Judicial

1.2 Economical
The economy of Mexico is 11th to 13th largest in the world. Since the 1994 crisis (Mexican peso crisis), administrations have improved the country 's macroeconomic fundamentals. Mexico was not significantly influenced by the recent 2002 South American crisis, and has maintained positive, although low, rates of growth after a brief period of stagnation in 2001. The economy contains rapidly developing modern industrial and service sectors, with increasing private ownership. Recent administrations have expanded competition in ports, railroads, telecommunications, electricity generation, natural gas distribution and airports, with the aim of upgrading infrastructure. As an export-oriented economy, more than 90% of Mexican trade is under free trade agreements (FTAs) with more than 40 countries, including the European Union, Japan, Israel, and much of Central and South America. The economy took a great hit during the financial crises starting in 2008, but the recovery is in progress and the economy is getting back on its feet. Government officials and several economical experts forecast a growth of 3% in 2010.

1.3 Social
The population of Mexico consists of 111,211,789. The age structures are:
- 0-14 years: 29.1% (male 16,544,223/female 15,861,141)
- 15-64 years: 64.6% (male 34,734,571/female 37,129,793)
- 65 years and over: 6.2% (male 3,130,518/female 3,811,543) (2009 est.)
As you can see the biggest part of the population is in category 15-64 years. Those are mostly the working environment. The growth rate of the population in Mexico is 1.13%.
The percentage of the total population living in urban areas, as defined by the country is 77% of total population. Ethnic groups in Mexico are mestizo (Amerindian-Spanish) 60%, Amerindian or predominantly Amerindian 30%, white 9%, other 1%.

1.4 Technological
With a population of just over 100 million and a GDP approaching $866.3 billion (2009 est.) Mexico 's economy is largely based on services (61.3%) and manufacturing (34,5%), with agriculture represented only by 4.1% in 2009. The government allows companies to deduct R&D expenses as incurred. Mexico also provides a 30 percent tax credit for qualified spending. In 2008, Mexico was the world 's seventh-largest crude exporter, and the third-largest supplier of oil to the United States. Oil and gas revenues provided more than one-third of all Mexican Government revenues.

1.5 Legal
The Mexican legal system is based on Spanish civil law with some influence of the common law tradition. Spanish civil law is based upon strict adherence to legal codes and minimal jurisprudence. The most powerful juridical instrument is the writ of amparo, which can be invoked against acts by any government official, including the president. The Mexican Supreme Court of Justice is prohibited by the constitution from applying its rulings beyond any individual case.
Alcohol law
Zapatista Communities will often ban alcohol as part of a collective decision. This has been used by many villages as a way to decrease domestic violence and has generally been favored by women. However, this is not recognized by federal Mexican law.[1]

The legal drinking age
The legal drinking age refers to the earliest age in a country that a person is legally allowed to buy alcoholic beverages. In Mexico the drinking age is 18 years old.

1.6 Environmental
Beginning in the mid-1980s, the government enacted numerous antipollution policies in Mexico City with varied degrees of success. Measures such as vehicle emissions inspections, the introduction of unleaded gasoline, and the installation of catalytic converters on new vehicles helped reduce pollution generated by trucks and buses. In contrast, one of the government 's most prominent actions, the No Driving Day program, may have inadvertently contributed to higher pollution levels. Thermal inversions reached such dangerous levels at various times in the mid-1990s that the government declared pollution emergencies, necessitating sharp temporary cutbacks in vehicle use and industrial production.

2. Hofstede-Analysis

2.1 Power distance
The dimension scores higher in Mexico than in other Latin-American countries with a rank of 81, compared to an average of 70. Mexicans tend to prefer a more distant relationship between workers and managers than what is typically found in a society that ranks low on power distance, such as in the United States. In walking through Mexican manufacturing plants and construction sites, one rarely sees a Mexican manager getting his hands dirty. Mexican managers are typically attired in business suits that reflect their status in the organization. Mexican workers expect managers to keep their distance rather than to be close, and to be formal rather than informal.

2.2 Individualism
Mexico has a low Individualism ranking 30, but is slightly higher than other Latin countries with an average 21 . The score on this dimension indicates a high collectivism in the society compared to individualistic behaviour. Loyalty in a collectivist culture is paramount, and over-rides most other societal rules and regulations. The society fosters strong relationships where everyone takes responsibility for fellow members of their group. This is noticeable in the motivation of the average Mexican to be loyal to his company and supervisor.

2.3 Masculinity
Mexico has the second highest masculinity ranking in Latin America (69). This indicates the country experiences a higher degree of gender differentiation of roles. Mexican people have more macho style of working. The men in Mexico think they are better than female in doing the same job in the same industry. Mexican women are very competitive towards men to show that they are able to perform just as well. The degree of economic participation of women was 35 percent in 2008, while that of men was about 75 percent. Women play crucial roles in the family, but even here the male is "chief of the family". Women are seen as the caretakers. It is generally assumed that many women are employed in non registered and underpaid informal activities.
2.4 Uncertainty avoidance
Mexico 's highest Hofstede Dimension is uncertainty avoidance (82), indicating the society’s low level of tolerance for uncertainty.

Mexicans typically desire close supervision rather than being left alone. They try hard to follow directions and do what they are asked to do. Labour compensation systems emphasize consistency and certainty, and they are based on strict rules and regulations. This because Mexicans are more oriented to guaranteed situations and guaranteed pay job security is highly valued, Mexican workers want to be assigned structured roles and want to be rewarded for to the extend of efficiently they provide. Managers in Mexico are usually forced by companies to consistently follow an excessive amount of (unnecessary) equitable, recruiting and training practices.

2.5 Long-term orientation
Long term orientation is the extent to which members of a society adapt themselves to reach a desirable future. Short term orientation is the extent to which members of a society take their guidance from the past and try to fulfil their present needs and desires. Unfortunately we are unable to discuss this dimension with perspective to Mexico, since the research in long term versus short term orientation was never conducted in Mexico.

3. Investment opportunities

3.1 Tourism
In the tourism sector, Mexico ranks first in Latin America and with 22.6 million visitor arrivals in 2008, Mexico ends tenth in the world in terms of international tourist arrivals. WTTC’s (World Travel and Tourism Council) research shows that the country’s Travel and Tourism sector increased its contribution to 13.2% of Mexico’s gross domestic products, growing by 3.8%. Tourism is a national priority for Mexico, which provides all necessary facilities and legal guarantees for international investment. Mexico 's regulatory framework supports 100 percent foreign ownership in most economic activities, including real estate. Mexico 's foreign investment law provides legal guarantees and affords certainty to Mexican and foreign investors, while simplifying the administrative procedures for registering foreign investments. In addition to international trade agreements, the free repatriation of earnings, royalties, dividends and interest, and reciprocal investment promotion agreements have been key factors in attracting greater investment in Mexico 's tourism sector. The tourism industry is getting bigger and bigger, new restaurants, disco’s and hotels are not build in traditional Mexican manners. Entrepreneurs in the hotels, restaurants and café’s are aiming for tourists and the middle and upper class of the Mexican society.
A lot of new hotels and trendy lounge clubs are arriving in for example Mexico City. In those new clubs and hotels the visitors would like to get a exclusive beer and not a Corona.

3.2 Value chain
Heineken is looking to expand globally and become a bigger global player. For that reason Heineken is carefully analyzing emerging markets and came to the conclusion that they want to invest in Mexico. With the acquisition of the brewery FEMSA, Heineken created an advantage of scale in the beer market in Mexico.

Figure 1: Value Chain Model, Michael Porter

Like any other production process, the production of Heineken’s beer requires certain inputs, for examples are labor, raw materials, inbound and outbound logistics (figure 1). With the acquisition Heineken can save costs on several production posts. The two most important ones are outbound logistics and the operations. Because of the brewery in Mexico, Heineken does not have to ship their products from Europe to Latin-American anymore. Another advantage are the wages in Mexico for employees working on the production floor in the brewery. Those advantages will lead to enormous cost savings, that gives Heineken the opportunity to reach out to the lower and middle class in Mexico with an affordable product under another brand name.

3.3 Selling the premium lager ‘Heineken’ in Mexico
The economy of Mexico is growing fast; expectations are that the gross domestic product will be increasing rapidly over the coming years. A side effect of the economic growth will be a rising purchasing power for the citizens. People with growing purchasing power will more and more demand quality products. In the beer industry Heineken is known as one of the finest premium lagers. Our expectations are that beer under the name Heineken will be a success in Mexico, especially since Mexico is bordering with the United States where Heineken is a well established high class brand.

Heineken is already busy trying to tap into this market. They are focusing on establishing their brand name, by adapting their large international campaign to the Mexican local culture. With this campaign they are trying to reach a curtain target group; young creative and innovative people in the twenties and thirties who don’t mind paying a little extra for a special foreign beer like Heineken. Heineken is more expensive because its an imported premium lager, this and the fact that its from Europe makes it in particular interesting for the upper and middle class, who have the tendency to be more European minded in their purchasing behavior. The key idea is that you are not only selling a premium lager, but also a social status.

In short, the investment opportunity is increasing the input in marketing and sales (figure 1) of Heineken in Mexico.

3.4 Chosen Strategy
This investment opportunity focuses on a specific target group in the market; the upcoming and rising amount of Mexicans in the middle- and upper class.

Middle- and upper class Mexicans also associated themselves more with the “Western societies” examples of that can be found in one of the many Americanized cities such as Nuevo Leon where housing, infrastructure, and the entire landscaping has a lot of American and European characteristics. Not to mention the large amount of typical American cars and stores such as Chrysler and shopping plaza’s. The increasing of towns like Nuevo Leon together with the substantial growth of Mexican’s middle class tells us that there is a specific target group of middle- and upper class Mexicans who have a lot of affiliation with the western world in terms to their products and living standards. An example for the advertising campaign would for instance be broadcasting international Heineken campaigns.

4. The future of Mexico

4.1 Future of the product and market: Short-term (within 1 year)
The biggest brewer and therefore biggest competitor of Heineken, Grupo Modelo is trying to protect his market share in Mexico. The beer market just might change in Mexico. Despite the resistance from Grupo Modelo, Heineken will try to get Mexicans to drink the Dutch premium lager ‘Heineken’.
Heineken will begin by adjusting the international campaign to the local culture. Heineken is advertising much more and on bigger billboards too create bigger brand awareness. On those billboards Heineken is trying to reach their target group directly with one liner.

Their target group can be defined as creative young people between the twenty and thirty years old, who do not mind paying just a little extra for ‘different kind of beer’. This target group goes out and party very often and usually see people drinking Corona, which is getting quit boring. Heineken is a bit more expensive since it is a premium lager imported from Europe which makes it special.

It is important to understand that the middle and upper class in Mexico has an undefined craving towards all trends, products and services coming from Europe. Heineken will not be solely selling beer in Mexico, with buying a Heineken beer a piece of status is bought at the same time. A very big advantage of the target group in middle and upper class is that Heineken is very often offered to serve at big private parties and opening ceremonies that deliver direct and indirect incomes. A new approach of Heineken is that they will arrange a disc jockey and equipment as well.

In short: Heineken (the brand) will be a well known in Mexico serving the middle and upper class within the age range of twenty to thirty years old.

4.2 The future of the product and market: medium-term (1 to 5 years)
Mexicans drink 55 litres of beer per year. The beer industry employs 88,000 workers directly. Another 1.5 million people have jobs because of this industry.

Mexico comes in at number 30 in the world when it comes to beer consumption. Beer takes first place as the alcoholic beverage of choice between Mexicans. It has a 76% market share. Tequila, Brandy and Rum have 23% of the market. The beer industry is one of the most prevalent in the country with over 63% of the population buying one brand or another. The beer market in the coming 5 year will grow to a larger scale, because mexico has economy of scale for producing beer. They are already exporting mexican beer to more than 150 countries. Mexico already has 63% of the market share in the beer industry that for a country like mexico is very important there economy will depend on it. As we also look to the habbits of people from other countries beer has been consumed more and on a large scale see the link below for beer consumption details of each country[2].

Heineken will easily survive the coming years in the Mexican beer market, because they will not only operate in Mexico but they will export to other countries in Latin America as well.

The vision of heineken for the coming 5 years is[3]:
We are the continental brewery of greater profitable and sustained growth in America, duplicating the size of the business in scale every 10 years and its economic income every 5 year.

What Heineken wants to achieve in the coming 5 year concerning the market[4]:
As the largest beverage company in Latin America, we reach close to 200 million consumers across 9 different countries daily.

4.3 The future of the product and market: long-term (5 to 10 years)
In the coming years Heineken will achieve much larger market share than now because of certain economic reasons. Heineken in Mexico was influenced by recessions in Mexico. People where thinking twice before they where spending the money. The jobs where cut down, the unemployment rates were high.

Because the Mexican market is recovering from the recession the export of beer from Heineken in Mexico will increase again. Heineken will be able to export more to other countries because the ingredients will be available again for a reasonable prices. Heineken will also be able to brew at a capacity of 100 percent again. It is likely that Heineken will generate an higher turnover comparing the past year, since the economy will stabilize.

Also the income of people in Mexico will rise they will be able to purchase premium Heineken beer again instead of buying cheap beer. Also the Mexican flue had a major roll in the sales of Heineken in Mexico. They will generate more income through the tourisms branch again. The tourist will be prepared to travel to Mexico again. Resorts and hotel will be prepared to purchase premium beer for their foreign customers.

5. Ethical challenges

5.1 Corruption
A public survey, released Dec. 9, 2009, showed that Mexico was one of the top four countries in the world, where the largest number of respondents- between 35 percent and 50 percent, said they or someone in their family had paid any kind of bribe in the last 12 months. The majority told that the bribes they have paid been directly given to the authorities; a civil servant, police officer, etc.
Corruption extends from the ordinary citizen to high reaches of government. Most Mexicans have become used to paying bribes to the average police officer or other government officials, because they believe it is the only way to get around the system, however this leads to corruption becoming the system. Civil servants, like police officers assume they are expected to take and use the bribes as an addition to their salaries, which are generally low.
The CEO Heineken Mexico, Ruud Bakker states in an interview: “Getting a simple permit can take years, but if you are willing to pay a more all sorts of doors open for you. It comes down to the fact that nothing is allowed but everything is possible. However, Heineken can’t be associated with these kind of practices, therefore we are doing it the long- and hard way.”

5.2 Crime and drugs problems
As a renowned beer company such as Heineken we do not suffering so much from the crime and drugs problem in Mexico. Our target group are well established people with good jobs and decent incomes. Who can afford a premium lager.

Worldwide the beer manufacturer Heineken, both as the Group and its most valuable brand carry the same name, therefore reputation management is very importance. Heineken has a positive corporate reputation and our operating companies are well respected in their region. The Company reputation and sales could be damaged by product integrity or unlawful issues. Therefore, production, management and logistics go through thorough quality standards and monitoring procedures.

As we all know Mexico is a country with a lot of drug problems. Mexico is the main export drugs market in Latin America for United States. Thousands of kilos of cocaine, heroin, and marijuana are transiting from Mexican borders to United States every year. In Mexico, the high crime rates are an example of the drugs cartels. The increase of crime rate is mostly in the urban rural areas where the population is not well educated and do have little options in terms of job opportunities. The Mexican government is struggling with these problems for years now.

5.3 Alcoholism
Although Mexicans are not the biggest consumers of alcohol with a average consumption of 55 liters per capita per year, alcoholism influences tens of millions of lives in Mexico each day. Anthropologist and academic Luis Berruecos explains that 45 million, out of the 106 Mexicans are influenced directly or indirectly by the problems brought into the society because of alcoholism. A couple of common examples of problems are violence against women and children, poverty that leads to bad education for children and unhealthy habits in households.

Mr. Berruecos has a clear answer to the question why alcoholism is such a big problem in Mexico’s society. ‘The most important cause of the problem is the culture of Mexico. Getting or being drunk is no unusual and humiliating action. In the culture there are too many reasons and occasions to get drunk. When you where conceived, your parents where drunk. When you were born, your parents got drunk. When marry, your parents will get drunk.’ Mr. Berruecos concludes: ‘It is the social element that is the biggest problem, in Mexico it does not matter if a person gets drunk at a party.
It is a problem existing for quiet some years now and Heineken needs to determine how to respond to the problems in the society regarding alcoholism as a supplier of alcoholic drinks. Heineken is a company that tries to make their turnover as big as possible, but because of all of the alcoholism problems, Heineken should be careful in bringing their products to the market. Heineken already states with every commercial and advertisement that their products should be used for joy and used with caution, since it is clear that excessive usage of alcohol is dangerous and damages many lives every day.

6. How to do business in: Mexico![5]

Working hours
Offices: Office hours are generally from 8am to 6pm (8.00/18.00). Office Lunches are usually taken between 1pm and 3 pm and last for between 1 and 2 hours.

Eating (out)
Meal Expenses: The person doing the selling pays for the meal expenses.
Breakfasts: In Mexico, Breakfasts are the most effective meals to do business which very common in Mexico. It’s common to bring paperwork, charts of facts and figures during business breakfasts.

Authority, Status & Decision Makers
Mexican Businesses tend to be very hierarchical. Status and position are important. When present a Mexican firm 's top managers they will expect to be seated with someone with the same rank. They will feel insulted if people lower in “rank” then themselves are sent to meet with them. Equally, if a firm sends lower level managers to deal with high level people in your company, then you will be wasting your time.

Time and Punctuality
In Mexico, time is not regarded as important as in western economies. Time is a very flexible thing in Mexico. Therefore its common not to show up in timely fashion such, no offence should be taken.

Language
Spanish is Mexico 's official language, and business meetings normally take place in Spanish. Even though your hosts are likely to accommodate your language needs, an attempt to communicate with broken Spanish will be warmly appreciated and seen as a sign of interest and respect.

Written Communication
All marketing literature, product manuals, warranty info, labelling, and anything you expect to present or leave with your contact should be in Spanish. It will show respect, and show that you are serious about doing business in Mexico.

Negotiating in Mexico when you 're doing business in Mexico, the most important thing to remember is that the relationship and trust must be developed first, and then they do business. If you don 't build the relationship, they will be highly reluctant to do business with you.

Bibliography

Internet

1. en.wikipedia.org/wiki/Politics_of_Mexico 2. http://en.wikipedia.org/wiki/Economy_of_Mexico 3. http://www.geert-hofstede.com/hofstede_mexico.shtml 4. http://findarticles.com/p/articles/mi_m1038/is_n3_v39/ai_18348268/?tag=content;col1
Appendices

Geert Hofstede’s Cultural Dimensions of Mexico

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Bibliography: Internet 1. en.wikipedia.org/wiki/Politics_of_Mexico 2. http://en.wikipedia.org/wiki/Economy_of_Mexico 3. http://www.geert-hofstede.com/hofstede_mexico.shtml 4. http://findarticles.com/p/articles/mi_m1038/is_n3_v39/ai_18348268/?tag=content;col1 Appendices Geert Hofstede’s Cultural Dimensions of Mexico [pic]