Mexico’s leading breadmakers, Bimbo and Grupo Maseca (GRUMA) have been engaged in a market battled referred to as “the Mexican bread war” for the past three years. The stakes are expected to rise later this year when Gruma expands into the Central Mexico market. Both companies are also struggling to overcome difficulties in their foreign activities, reports Steve Lewis

Grupo Maseca (GRUMA) started Mexico’s bread war three years ago with the introduction of its Bredy brand. The stakes will rise later this year when Gruma expands into the Central Mexico market, which includes the roughly 27 million residents of Mexico City. While engaged in market share battles in Mexico, both companies are also struggling to surmount problems in their overseas operations.

The meagre profit margins of Bimbo and Gruma stand as testimony to the damage caused by price wars in a stagnant consumer market. As the two grappled for market share, the price of their products lost ground to inflation over the past three years. As Latin America, and Mexico in particular, feels the brunt of the US economic slowdown this year, it will be difficult for bread makers to bolster their profit margins.

The battle expands into Mexico City

Panificadora Azteca, the company that Grupo Maseca created to handle its bread production, announced in July that its products would be introduced in Mexico City by the end of this year. Upon announcing the company’s expansion, president Francisco Albusua projected that sales this year will be 30% greater than the level in 2000. The main challenge facing Gruma is to convert increased sales volume into sustainable profit.

The first stage in Gruma’s expansion will be to use its bread recipes to produce proprietary brands for the leading supermarket chains of Central Mexico, including Aurrerá, Gigante, and Wal-Mart. In the company’s operational report for the first half of this year, Albusua was quoted as saying: “We are now working out the logistics of producing bread for supermarkets and expect to launch our products by the end of the year.”

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Competition from Bimbo has been fierce, and growth now hinges on product innovation. Management recently announced that it would introduce four new bread products based on European recipes. These original recipes include Dutch, French, Italian, and Swiss bread.

Management anticipates that the new bread products will considerably boost Bredy’s’ 30% market share in Northeast Mexico. As Albusua puts it: “We continue to face very intense competition because Bimbo has been in this business for many years and we have only been at it for three, but we have no doubt that we will continue to grow.”

Industry downplays Gruma’s threat

In spite of the fact that Gruma has carved out a substantial market share in Northeast Mexico, Bimbo does not see Bredy as a major threat to its Mexican operations. In a recent operational report, finance director Guillermo Quiroz said: “We are competing normally with them, but we don’t see their market share increasing, it is just holding steady.”

Bimbo management refutes Gruma’s market share estimates, claiming that Bredy’s Northeast Mexico share is in the range of 18% to 20%. Gruma has a heavy debt burden and anaemic operating profits. As a result, Bimbo leadership doubts Gruma’s ability to carve out a significant market share in Central Mexico.

Industry analyst Abel Hibert, shares Bimbo’s scepticism. Hibert says: ”

“As I see the situation, Bredy got started by attempting to compete in a segment that Bimbo dominated, and where it enjoyed strong customer loyalty” – Abel Hibert

As I see the situation, Bredy got started by attempting to compete in a segment that Bimbo dominated, and where it enjoyed strong customer loyalty. At first Bredy enjoyed success because it was a novel product to the market.” He went on to project that Gruma would ultimately not be able to compete with Bimbo because the latter has well-established distribution channels throughout Mexico.

Bimbo’s problems abroad

Bimbo can ill afford for Gruma to eat into its still-dominant share of the Mexican bread market. Mexican consumers are now feeling the ripple effect of the economic slowdown in the United States and this has led to generalised stagnation in food sales.

Although the company’s international expansion in recent years has been impressive, the return on investment has not. Through last year, foreign sales accounted for about a quarter of total earnings, yet they generated only 4% of corporate cash flow. Bimbo management has proven that it can boost production and sales through acquisitions, but it is under pressure to achieve better results overseas.

The purchase of Brazilian bread maker Plus Vita, Ltd. in March of this year for US$63.5m placed Bimbo solidly among the world’s top three bread makers in terms of production and sales volume. Latin American sales rose 32% during the first half of this year, but that gain is mainly attributable to the Brazilian acquisition. However the volume of sales increased throughout Bimbo’s Latin American operations, accounting for 40% of overall gains in the region.
Gruma feels StarLink backlash

Last year Gruma became embroiled in a scandal when StarLink corn was discovered in tortilla chips and other corn-base products in the United States. One of the leading distributors of the corn in question was Azteca Mills, based in Plainview, Texas. Azteca is a joint venture company owned by Gruma and Archer Daniels Midland.

On 16 October Gruma announced that it would withdraw all yellow corn products from the market until the StarLink content was eliminated. The expense of that recall came at a time when Gruma was struggling to launch its Bredy product line in Mexico.

Both Gruma and Bimbo will have a difficult time boosting profit margins over the next year. They will be faced with a substantial increase in promotional expenditures if a market struggle erupts in Central Mexico. To make matters worse, the companies are probably headed toward another pricing battle like the one recently experienced in Northeast Mexico. That would further erode earnings for both, thus limiting further expansion.

By Steve Lewis, correspondent

To view related research reports, please follow the links

2000-2005 World Outlook for Bread

U.S. Market for Bread 2000