The Schlitz operation that I purchased was located in far South Texas along the Rio Grande River bordering the country of Mexico. This area, known as the Rio Grande Valley, was economically booming at the time due predominantly to Mexico.
The exchange rate of the peso versus the dollar was 22 to 1, which created a booming economy and the Mexicans poured into the U.S. spending large amounts of money in the Texas economy. It was not uncommon to see the mall parking lot in McAllen, TX packed with cars from Mexico, even on a weekday. The Mexicans would purchase large amounts of consumer goods, stuff them into empty suitcases and take their newly purchased items back across the border. Upscale retailers never ran discounts or sales, it was not necessary.
The price of everything was inflated, including houses. The market was so hot; houses were selling in one day for more than asking prices. While sitting in my lawyer’s office one afternoon, a Mexican walked in with a briefcase full of U.S. currency, ready to purchase a house in McAllen. Times were good for everyone.
During my second year in McAllen, the Mexican government devalued the peso to 2200 to 1 versus the dollar. Immediately, the business coming across the border dried up. That, combined with the worst winter in 100 years that killed all the citrus trees, caused unemployment in the Texas/Mexico border to soar to almost 50%. The economy had collapsed.
Needless to say, this was a disaster for all of us in the beer industry. The total market shrank. Volume disappeared. No matter what our operation did the entire market shrank by more than one third. Times were very tough.
In 1999, 19 European countries adopted the euro as its currency. During the early years of the euro, the exchange rate verses the U.S. dollar favored the dollar. By the mid-2000s, the exchange rate had gone to 1.60 euros to 1 dollar making importing products from Europe, including beer, very expensive.
European breweries, many being managed by accountants, began adjusting to the new rates. Some, like Carlsberg and Bavaria, eliminated their US operations totally, and bet on other countries to build their business. Carlsberg walked away from the U.S. and invested heavily in Russia.
During the years running the U.S. Warsteiner operation I had a consistent struggle with the brewery over the exchange rate. Eventually, after massive brewery price increases, Warsteiner’s volume declined by 39%. Downsizing the U.S. operations to offset the price increases enabled the brewery to remain in the black, but it came at a cost.
At least Warsteiner maintained its U.S. operation and remained independent, while breweries like Bavaria and Carlsberg did not.
At the time of this blog, the exchange rate has fallen from a high of 1.60 to 1 to close to 1 to 1. The industry is now seeing a renewed interest from the European breweries. Given what has happened with the beer industry in Europe, especially to Carlsberg in Russia, these companies are looking west once again.
Look for more investment spending from the Europeans, but those companies that kept their infrastructure in place will benefit the most and quickest. Remember, like almost everything, what goes around will come around again!