Thirst for Success

Panamco, the giant Latin bottler and distributor, thrives despite erratic markets.

Panamco At A Glance

  • Business: Soft-drink bottling
  • CEO: Francisco Snchez-Loaeza
  • Employees: 46,000
  • 1999 Net Sales: US$2.4 billion
  • 1999 Net Loss: US$59.9 million
Prosperity in the U.S. makes it easy to forget that elsewhere business must navigate much choppier waters. In Latin America, for example, a region beset with currency crashes, political upheaval, and natural disasters, companies have learned to accept precarious conditions as an unavoidable fact of life. Panamerican Beverages Inc. (Panamco), Latin America's largest Coca-Cola bottler and distributor, has lived this precarious reality for almost 60 years. In that time the company has learned not only how to survive but to thrive in the erratic Latin American marketplace. Panamco's mantra seems to be that if it doesn't kill you it makes you stronger. In the last decade alone the company has weathered the Mexican peso crisis of 1994, the Asian flu of 1997, and the Russian contagion of 1998. Yet each time Panamco has emerged a more powerful company. "Many American and European companies come to Latin America to do business, but the vast majority of them are not successful," says Panamco's Chairman and CEO Francisco Snchez-Loaeza. "The problem is they do not understand the complexities of the Latin American business environment. Companies that have been here for awhile and understand the culture, they survive." As Coca-Cola's largest subsidiary in Latin America, Panamco is vital to Coke's global operations. As a bottler, Panamco manufactures, sells, and distributes branded carbonated and noncarbonated soft drinks as a franchisee of the Coca-Cola Co., which supplies concentrate to make the drinks. Panamco's almost 60-year bottling relationship with Coke has made it a strategic partner in the Coca-Cola bottling system in Latin America. The company has grown into a pan-Latin American entity with 121 million potential consumers in its franchised area and operations in Mexico, Brazil, Colombia, Venezuela, and Central America. A string of recent acquisitions has enhanced Panamco's business position by adding important territories to its operations as well as improving its geographical diversification. The company maintains headquarters offices in Mexico City, Miami, and Panama City, Panama. Snchez-Loaeza sees adaptability as his company's core survival skill and a secret behind Panamco's ever-expanding Latin American empire. He also credits Panamco's "democratic" management philosophy, logistical expertise, innovative merchandising strategies, and excellent financial stewardship as factors in its continued success and, of course, the company's ability to weather the storms churned up by Latin American economies. A look at Panamco's handling of the 1994 peso devaluation shows the company's adeptness at making the most out of a bad situation. A little more than a year after listing on the New York Stock Exchange, and only eight months after Snchez-Loaeza took over as chairman, Panamco steered itself through one of the most tumultuous periods in the history of Latin American markets. Throughout the crisis, while competitors were pulling in the reigns, Panamco kept investing. The result was a 20% gain in market share in the two years following the crisis. "We didn't panic, and that helped us. We operated much the same as if nothing were wrong," says Snchez-Loaeza. "During the devaluation we didn't reduce investments, especially in assets that could generate volumes. We suffered less than our competitors because we invested in new markets. We spread our risk, and it minimized damage from the crisis. It's a long-term business we're in and we always see it that way." Panamco's long-term view is a product of its long-standing presence in Latin America. The company began in 1941 when Albert H. Staton Sr. and a group of investors acquired a core of Coca-Cola-franchised bottling operations in Mexico. Panamco incorporated in 1945 while expanding into Brazil and Colombia, acquiring additional Coca-Cola bottling franchises within those countries. The company's aggressive expansion has accelerated over the last decade. In 1995 Panamco moved into Costa Rica. It entered Venezuela and Nicaragua in 1997 before acquiring Guatemala's largest Coca-Cola bottler in 1998. It then expanded into Brazil. While it took 52 years for the company to reach its first US$1 billion in revenues in 1993, it took only four more years to reach $2 billion in 1997. Projections are that it will reach the $3 billion mark in only a few more years. Panamco's strategic value to Coke is due in large part to the same factor that has helped it survive its Latin American roots. "Our company was formed by an American, but is at heart a Latin company run by Latin people," says Snchez-Loaeza. "When you have the combination of a large global company, access to capital, and knowledge of local customs, it's a recipe for success." Scott Wilkins, a New York-based beverage-industry analyst at Deutsche Banc Alex. Brown, agrees that local knowledge is vital to doing business in Latin America. "All of Latin America's challenges require a Latin company that understands the mentality and the rules for doing business in this climate. Bottlers must maneuver within the bureaucratic confines of each country's local government. In Latin America this can be mercurial. "Bottlers are in a capital-intensive business," adds Wilkins. "Their investments involve many people. Getting approval for new projects is challenging, even for Latin companies. For foreigners it would be almost impossible." Wilkins praises Snchez-Loaeza for his ability to attract good people with local knowledge and contacts. "He relies heavily on local talent, people who understand the particularities of the Latin American countries and who know how to deal with problems and situations particular to their own countries. There's a refreshingly genuine quality about him, an ability to put people at ease. He can bring out the best in those who work for him -- and that's important in a company with this level of delegation." The high level of autonomy afforded Panamco's regional subsidiaries is reflected in its decentralized management style. Country presidents have the authority to make decisions and respond independently to market forces in their territories. They are encouraged to implement their own programs and initiatives. "I do not see my role as CEO just to give orders," says Snchez-Loaeza. "I can't sit here in Mexico City and make decisions for Colombia. What works in Brazil does not necessarily work in Colombia and vice versa. Out of necessity, our strategies are local strategies that flow from local management expertise and knowledge of the market." Panamco executives act as consultants to country presidents, weighing in on decisions to make sure they adhere to overall company strategy. "HQ responsibility is split in two -- financial management and operational oversight," says Snchez-Loaeza. "Finance is our main function; we fulfill the requirements of being a public company. Corporate activities are to support rather than direct operating units who themselves manage the day-to-day business." In Colombia, for example, local management acted independently to open miniwarehouses to supply almost 400,000 points of sale -- a decision that brought operational advantage and cost savings. And in Brazil in early 1999, while an economic crisis gripped the country, local management launched a promotional pricing strategy that promised to increase sales, which in the end created a 5.2% market-share gain. Another successful practice is "cross management," which entails transfers of midlevel executives between operating units to develop programs with company presidents in other local markets. This practice allows a constant flow of information and ideas between regional operating units and corporate headquarters. Panamco's management procedures rest on three pillars: flexibility, communication, and quick reaction. "This is a daily business, and you need to be fast," says Panamco's CFO Paulo Sacci. "Our organization is designed to shift gears rapidly. At all levels, we allow for immediate changes in direction. Our decision makers react quickly as regional situations dictate." An ongoing challenge is managing the company's financial position, from debt levels to terms of credit with vendors and customers. "In a market like this you need to be prudent," says Sacci. "About 10 years ago, we had inflation over 1,000%. We coped with that because we knew how to protect our cash. We limited credit sales, charged interest on every credit sale, and radically enforced our collection practices. We manipulated our cash sales by translating daily cash balances into hard currency. We looked at our debt structure, from outstanding loans to financing, with our vendors. Finally, we were proactive with our prices, reacting on a day-to-day basis as the currency value fluctuated." Panamco's latest adjustment was its 1993 transition from a private, family-run company to one of the first Latin American companies listed on the New York Stock Exchange. "The core ways we used to run the business have changed," says Snchez-Loaeza. "Now, investors demand quarterly projections and visions for the future. We were used to managing our company internally as if the market didn't exist. Now we have to be more formal and transparent. It was a tremendous cultural shock." Yet despite its transformation to a public company, according to Snchez-Loaeza Panamco retains its "family-run" soul. "In Panamco, even though people are from different nationalities and backgrounds, we move as a big family. Our kids play together or go to school together. Our parties are family-oriented and spouses feel they belong to the organization. When someone has a problem, everybody helps." Since going public Panamco has pursued an aggressive growth strategy based on three avenues for expansion: acquisition of minority interests, geographic expansion through acquisition of new franchises, and organic growth. The company has invested close to $1.2 billion in the last few years to bolster organic growth through market development, new technology, and fleet and plant modernization. "When you have as much command of market share as Panamco, there is very little room to grow your business by affecting your competitors," says Snchez-Loaeza. "We had to start thinking out of the box, to grow our pie rather than getting a bigger [slice] of the pie." Panamco has rolled out new marketing programs guided by the idea that untapped opportunities for consumption of its products are everywhere. "The whole model we use is constantly being reviewed," says Snchez-Loaeza. "We learned there are different occasions for consumption -- times we need to have our product in front of customers. We are always looking for more opportunities that will increase consumption." At the heart of this initiative is the "100 Meters" program, which states that in any urban center no one should have to walk more than 100 meters to buy a Coke. Panamco also focuses on nontraditional, immediate consumption channels with approaches such as the one in Colombia where soft drink coolers are installed in taxis, and in all territories where vendors sell Coke at traffic lights. The company addressed increasing competition from other beverage products by producing and distributing flavored soft drinks and bottled-water products under licensed and proprietary trademarks in select territories. This includes Canada Dry products in Costa Rica, Kaiser and Heineken beers in Brazil, and Regional beer in Venezuela. "We want to both increase impulse purchases and provide more options for consumers," says Snchez-Loaeza. "People shop more frequently here than in America. We need to make our products more available in all the many places people might be thirsty in hot climates such as ours. People need two liters of liquid a day. The question is how much of that basic need will be filled by us?" All in all, Panamco enjoys steady market demand. "Even during tough economic times, the fundamentals of our business are still there," says Snchez-Loaeza. "No matter what economic downturns may come, we can count on a steady demand for our products." As of 1998 Panamco had invested over $1.4 billion in new franchise acquisitions. Most of the expansion has been in emerging markets, which are attractive not only for favorable demographics (young population and high population growth) but also for low per-capita consumption of carbonated drinks and less competition in other soft drink categories. Panamco's operating units enjoy a strong business profile and high market share in their countries. This results in a relatively stable financial situation that increases cash-flow generation by the group. The company's shrewd performance over the last decade has impressed financial analysts. "Panamco's geographic diversity, along with its strong position in all of the countries where it operates, makes for a very appealing company," says Sandra Fainz, of Standard & Poor's Corporate Ratings Dept. in Mexico City. "And these Latin American countries have very high growth potential." Fainz praises Panamco's ability to adapt to recessionary conditions in countries where it operates. "What they did in Mexico in 1994, for example, they have done since then in Brazil, Venezuela, and in Colombia. They can manage their financial picture among seven very different countries. When they need money for subsidiaries, they find the most efficient way to channel funds that gains them maximum benefits and overall financial advantages." Panamco's stock price has declined recently (down 5.7% in 1999, and down 4.6% thus far this year). The company had a net income loss of $59.9 million in 1999 on net sales of $2.4 billion. But the company's problems, according to Deutsche Banc Alex. Brown, have been largely external, with economic influences weighing heavier than internal factors such as market execution and efficient production. Panamco cites currency devaluations, facilities reorganization charges, and expenses due to severe flooding in Venezuela as reasons for the loss. Recent changes at Coca-Cola Co. present Panamco with new opportunities. In February Coke announced a plan to push worldwide decision-making down to the local level. According to a Feb. 6 article in The New York Times, in many parts of the world consumers have become more selective, more penny-wise, and more nationalistic, and are spending more of their money on local drinks whose brand names are not part of the Coca-Cola lineup. Coke now will embrace local brands and flavors more than it has in the past, selling a variety of soft drinks that cater to local tastes. "They were ignoring the local flavors for years," says Bill Pecoriello, a beverage analyst for Sanford C. Bernstein & Co. Inc., New York. "The opportunities were always there. Now they've put a structure in place to go after them." As a company adept at responding to local preferences, while at the same time catering to different market segments, Panamco is poised to capitalize on the localization trend -- as well as other changes in the Latin American market.
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