UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 20-F

 

     REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

 

X   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended                         December 31, 2009

 

     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

For the transition period from		_____________ to _____________
Commission file number		0-20486

 

COMPAÑIA CERVECERIAS UNIDAS S.A.

 (Exact name of Registrant as specified in its charter)

UNITED BREWERIES COMPANY, INC.

 (Translation of Registrant's name into English)

 

Republic of Chile

 (Jurisdiction of incorporation or organization)

Vitacura 2670, Twenty-Third Floor, Santiago, Chile

 (Address of principal executive offices)

 

Rosita Covarrubias,(562-427-3581), rosita@ccu.cl or rcovarr@ccu.cl

Vitacura 2670,Twenty-Third Floor, Santiago Chile

(Name, Telephone, Email and/or Facsimile number and Address of Company Contact Person)

_________________________________________

 

Securities registered or to be registered pursuant to section 12(b) of the Act.

		Name of each exchange
Title of each class		on which registered
American Depositary Shares		New York Stock Exchange
Representing Common Stock
Common Stock, without par value		New York Stock Exchange*

                           

__________ 

*    Not for trading, but only in connection with the registration of American Depositary Shares which are evidenced by American Depositary Receipts

 

Securities registered or to be registered pursuant to Section 12(g) of the Act.

Not applicable

 

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.

Not applicable

 

Indicate the number of outstanding shares of each of the issuer's classes of capital or common stock as of the close of the period covered by the annual report.

Common stock, with no par value:                                 318,502,872

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

YES         NO__ X__

 

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

 

YES         NO__ X__

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

YES    X     NO_____

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

YES______ NO_____

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer              X          Accelerated filer                       Non-accelerated filer

 

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

 

U.S. GAAP  ___           International Financial Reporting Standards as issued               Other ___ 

by the International Accounting Standards Board     _X__

 

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.

ITEM 17           ITEM 18       

 

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

YES         NO   X   

Table of Contents

Page
Introduction		i
Forward Looking Statements		ii
PART I		1
ITEM 1: Identity of Directors, Senior Management and Advisers		1
ITEM 2: Offer Statistics and Expected Timetable		1
ITEM 3: Key Information		1
ITEM 4: Information on the Company		10
ITEM 4A: Unresolved Staff Comments		55
ITEM 5: Operating and Financial Review and Prospects		55
ITEM 6: Directors, Senior Management and Employees		68
ITEM 7: Major Shareholders and Related Party Transactions		79
ITEM 8: Financial Information		83
ITEM 9: The Offer and Listing		86
ITEM 10: Additional Information		87
ITEM 11: Quantitative and Qualitative Disclosures About Market Risk		101
ITEM 12: Description of Securities Other than Equity Securities		105
PART II		107
ITEM 13: Defaults, Dividend Arrearages and Delinquencies		107
ITEM 14: Material Modifications to the Rights of Security Holders and Use of Proceeds		107
ITEM 15: Controls and Procedures		107
ITEM 16A: Audit Committee Financial Expert		108
ITEM 16B: Code of Ethics		108
ITEM 16C: Principal Accountant Fees and Services		108
ITEM 16D: Exemptions from the Listing Standards for Audit Committees		109
ITEM 16E: Purchases of Equity Securities by the Issuer and Affiliated Purchasers		109
ITEM 16F: Change in Registrant’s Certifying Accountants		109
ITEM 16G: Corporate Governance		109
PART III		112
ITEM 17: Financial Statements		112
ITEM 18: Financial Statements		112
ITEM 19: Exhibits		112

 

Introduction

 

In this annual report on Form 20-F, all references to “we”, “us” or “CCU” are to Compañía Cervecerías Unidas S.A., an open stock corporation (sociedad anónima abierta) organized under the laws of the Republic of Chile, and its consolidated subsidiaries.  Chile is divided into regions, each of which is known by its roman number (e.g. “Region XI”).  Our fiscal year ends on December 31st.  Unless otherwise specified, all references to “U.S. dollars”, “dollars”, or “US$” are to United States dollars, and references to “Chilean pesos”, “pesos” or “Ch$” are to Chilean pesos.  We prepare our financial statements in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”). These are the Company’s first annual consolidated financial statements prepared in accordance with IFRS as issued by the IASB and IFRS 1 “First Time Adoption of International Financial Reporting Standards”. Until and including our financial statements for the year ended December 31, 2008, we prepared our consolidated financial statements in accordance with Chilean generally accepted accounting principles, or “Chilean GAAP”, which differs in certain important respects from IFRS.  The effects of the transition to IFRS (from financial statements prepared under Chilean GAAP) on the Company’s financial statements for the year ended December 31, 2008 is detailed in Note 4 to our consolidated annual financial statements included elsewhere in this annual report. Following the Company’s adoption of IFRS, as issued by the IASB, we are no longer required to reconcile our financial statements prepared in accordance with IFRS to US GAAP. See the notes to our consolidated financial statements included in pages F-1 through F-88 of this annual report.  We use the metric system of weights and measures in calculating our operating and other data.  The United States equivalent units of the most common metric units used by us are as shown below:

 

 

This annual report contains various estimates made by us of market share data and related sales volume information.  These estimates are based on statistics published or made available by A.C. Nielsen Chile S.A., or Nielsen, in the case of beer, soft drinks, water, wine and pisco sales in Chile; the Asociación de Cerveceros de Chile (“Acechi”), in the case of beer sales in Chile; BBS(Inversiones Marco  Polo Limitada) in the case of imports in Chile; the Cámara de la Industria Cervecera Argentina (Argentine Beer Industry Chamber, or CICA) in the case of beer sales in Argentina; the Asociación Nacional de Bebidas Refrescantes (National Association of Soft Drinks, or “ANBER”) in the case of soft drinks and water; competitors public information in the case of wine sales in Chile; and the Asociación de Viñas de Chile, A.G. (the Wineries of Chile Association) in the case of Chilean wine exports.  We believe that, due to the methodologies used, the statistics provided by these sources in some cases do not accurately reflect our market share or industry sales volumes.  For example, the Nielsen sampling frame includes only the metropolitan areas of Chile and not the rural areas of the country, where we believe our beer and pisco market share is higher than in the metropolitan areas, due to our distribution system.  Likewise, the sales of one of our Argentine competitors are not reflected in CICA’s statistics because this company is not a member of CICA.  Similarly, data regarding the size of the Chilean soft drink and mineral water markets and market shares do not coincide with publicly available information of our sales volume and our competitors.  As a consequence, we have revised the share estimates from the sources identified above for Chilean and Argentine beer sales, pisco, soft drink and mineral water sales to reflect what we believe is a more accurate measure of market shares, taking into account:

 

·         reports published by the Instituto Nacional de Estadísticas (the Chilean National Institute of Statistics, or the INE),

·         our internal sales data,

·         sales information filed publicly by our competitors, and

·         import and export reports made available by Chilean and Argentine customs authorities.

 

However, our revised estimates have not been confirmed by independent sources.  Certain amounts, including percentage amounts, which appear in this annual report have been rounded and may not sum exactly to the totals shown.

Forward Looking Statements

 

This annual report contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, which we refer to as the Securities Act, and Section 21E of the Securities and Exchange Act of 1934, which we refer to as the Exchange Act.  These statements relate to analyses and other information, which are based on forecasts of future results and estimates of amounts not yet determinable.  They also relate to our future prospects, development and business strategies.

 

These forward-looking statements are identified by the use of terms and phrases such as “anticipate”, “believes”, “could”, “expects”, “intends”, “may”, “plans”, “predicts”, “projects”, “will” and similar terms and phrases.  We caution you that actual results could differ materially from those expected by us, depending on the outcome of certain factors, including, without limitation:

 

·         our success in implementing our investment and capital expenditure program;

·         the nature and extent of future competition in our principal marketing areas;

·         the nature and extent of a global financial disruption and its consequences;

·         political and economic developments in Chile, Argentina and other countries where we currently conduct business or may conduct business in the future, including other Latin American countries; and

·         other factors discussed under “Risk factors”, “Our business” and “Management’s discussion and analysis of financial condition and results of operations”.

You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this annual report.  We undertake no obligation to release publicly the result of any revisions to these forward-looking statements which may be made to reflect events or circumstances after the date of this annual report, including, without limitation, changes in our business strategy or planned capital expenditures, or to reflect the occurrence of unanticipated events.

 

ii

PART I

 

ITEM 1: Identity of Directors, Senior Management and Advisers

 

Not applicable

 

ITEM 2: Offer Statistics and Expected Timetable

 

Not applicable

 

ITEM 3: Key Information

 

Selected Financial Data

 

The following table presents selected consolidated financial data as of December 31, 2008 and 2009, which has been derived from our consolidated financial statements prepared in accordance with IFRS and included elsewhere in this annual report.  Selected consolidated financial data as of December 31, 2005, 2006 and 2007, has been derived from our consolidated financial statements not included in this annual report which were, at the time, prepared in accordance with Chilean GAAP and reconciled to US GAAP.  The financial data set forth below should be read in conjunction with the consolidated financial statements and related notes and “Item 5: Operating and Financial Review and Prospects” included elsewhere in this annual report.

The financial information as of and for the years ended December 31, 2005, 2006, and 2007 shown below is presented in constant Chilean pesos as of December 31, 2008.

---

 

Exchange Rates. Prior to 1989, Chilean law permitted the purchase and sale of foreign currency only in those cases explicitly authorized by the Central Bank of Chile.  The Central Bank Act, which was enacted in 1989, liberalized the rules that govern the ability to buy and sell foreign currency.  The Central Bank Act now empowers the Central Bank of Chile to determine that certain purchases and sales of foreign currency specified by law must be carried out in the formal exchange market.  The formal exchange market is formed by banks and other entities authorized by the Central Bank.  All payments and distributions made to our holders of ADSs must be transacted in the formal exchange market.

 

In order to keep fluctuations in the average exchange rate within certain limits, the Central Bank of Chile has in the past intervened by buying or selling foreign currency on the formal exchange market.  In September 1999, the Central Bank of Chile decided to limit its formal commitment to intervene and decided to exercise it only under extraordinary circumstances, which are to be informed in advance.  The Central Bank of Chile also committed itself to provide periodic information about the levels of its international reserves.

.

The observed exchange rate is the average exchange rate at which commercial banks conduct authorized transactions on a given date, as certified by the Central Bank of Chile.  The Central Bank of Chile generally carries out its transactions at the spot market rate.  Authorized transactions by banks are now generally conducted at the spot market rate.

 

Purchases and sales of foreign exchange effected outside the formal exchange market are carried out in the Mercado Cambiario Informal (the informal exchange market).  The informal exchange market reflects the supply and demand for foreign currency.  There are no limits imposed on the extent to which the rate of exchange in the informal exchange market can fluctuate above or below the observed exchange rate.  On April 30, 2010, the average exchange rate in the informal exchange market was Ch$517.23 per U.S. dollar and the U.S. dollar observed exchange rate was Ch$518.95 per U.S. dollar.

 

The following table sets forth the low, high, average and period-end observed exchange rates for U.S. dollars for each of the indicated periods starting in 2005 as reported by the Central Bank of Chile.  The Federal Reserve Bank of New York does not report a noon buying rate for Chilean pesos.

 

2

Capitalization and Indebtedness

 

Not applicable

 

Reasons for the Offer and Use of Proceeds

 

Not applicable

 

Risk Factors

 

RISKS RELATING TO CHILE

 

We are substantially dependent on economic conditions in Chile, which may adversely impact our results of operations and financial condition.

We are predominantly engaged in business in Chile and 72% of our sales revenues in 2009 were generated from our Chilean operations, 19% came from operations in Argentina and 9% from exports out of Chile.  Thus, our results of operations and financial condition are dependent to a large extent on the overall level of economic activity in Chile.  The Chilean economy has experienced an average annual growth of 3.4% between 2004 and 2009. In the past, slower economic growth in Chile has slowed down the rate of consumption of our products and adversely affected our profitability.  Chile’s recent economic performance has been affected by the current disruption in the global markets, and therefore the past growth rate should not be extrapolated into the future.

 

The relative liquidity and volatility of Chilean securities markets may increase the price volatility of our ADSs and adversely impact a holder’s ability to sell any shares of our common stock withdrawn from our ADR facility.

The Chilean securities markets are substantially smaller, less liquid and more volatile than major securities markets in the United States.  For example, the Santiago Stock Exchange, which is Chile’s main stock exchange, had a market capitalization of approximately US$231 billion as of December 31, 2009, while The New York Stock Exchange had a market capitalization of approximately US$18.5 trillion and the NASDAQ National Market had a capitalization of approximately US$4 trillion as of the same date.  In addition, the Chilean securities markets can be materially affected by developments in other emerging markets, particularly other countries in Latin America.

 

 

The lower liquidity and greater volatility of the Chilean markets relative to markets in the United States could increase the price volatility of the ADSs and may impair a holder’s ability to sell in the Chilean market shares of our common stock withdrawn from the ADR facility in the amount and at the price and time the holder wishes to do so.  See “Item 9: The Offer and Listing”.

 

Chilean economic policies, currency fluctuations, exchange controls and currency devaluations may adversely affect the price of our ADSs.

The Chilean government’s economic policies and any future changes in the value of the Chilean peso relative to the U.S. dollar could adversely affect the dollar value of and the return on any investment in our ADSs.  The Chilean peso has been subject to large nominal devaluations and appreciations in the past and may be subject to significant fluctuations in the future.  For example, in the period from December 31, 2008 to December 31, 2009, the daily average value of the Chilean peso relative to the U.S. dollar decreased by 7.1% in nominal terms, whereas the year end value increased by 20.3%  based on the observed exchange rate for U.S. dollars on those dates. See “Exchange Rates”.

 

Chilean trading in the shares of our common stock underlying our ADSs is conducted in Chilean pesos.  Cash distributions to be received by the depositary for the shares of our common stock underlying our ADSs will be denominated in Chilean pesos.  The depositary will translate any Chilean pesos received by it to U.S. dollars at the then-prevailing exchange rate with the purpose of making dividend and other distribution payments for the ADSs.  If the value of the Chilean peso declines relative to the U.S. dollar, the value of our ADSs and any distributions to holders of our ADSs received from the depositary may be adversely affected.  See “Item 8: Financial Information – Dividend Policy and Dividends”.

 

We are subject to different corporate disclosure requirements and accounting standards than U.S. companies.

Although the securities laws of Chile which govern open stock corporations and publicly listed companies such as us, have as a main objective promoting disclosure of all material corporate information to the public, Chilean disclosure requirements differ from those in the United States in certain important respects. In addition, although Chilean law imposes restrictions on insider trading and price manipulation, the Chilean securities market is not as highly regulated and supervised as the U.S. securities market. We have been subject to the periodic reporting requirements of the Exchange Act since our initial public offering of ADSs in September 1992.

 

RISKS RELATING TO ARGENTINA

 

We have significant operations in Argentina and economic conditions there have adversely affected our results of operations.

In addition to our operations in Chile, we maintain substantial assets in Argentina and derive significant revenue from our operations in Argentina.  In 2009, we derived Ch$148,337 million, or 19%, of our revenues from our Argentinean operations, and, as of December 31, 2009, Ch$136,754 million, or 12.4%, of our assets were located in Argentina.  From 1999 through 2002, Argentina suffered a prolonged recession, which culminated in an economic crisis, with negative growth rates of -3.4% in 1999, -0.8% in 2000, -4.4% in 2001 and -10.9% in 2002.  Although the economic situation in Argentina has improved during the last seven years – GDP grew 8.8%, 9.0%, 9.2%, 8.5%, 8.7%, 7.0% and 0.9% in 2003, 2004, 2005, 2006, 2007, 2008 and 2009, respectively – in the future it could materially and adversely affect our Argentine operations.  See “Item 5: Operating and Financial Review and Prospects – Trend Information”.

 

The Argentine peso is subject to volatility which could adversely affect our results.

A devaluation of the Argentine peso adversely affects our operating results, as our revenues from our Argentine operations are impacted by the devaluation of the Argentine peso.  In spite of the appreciation of the Argentine peso against the U.S. dollar in recent years, we cannot predict whether the Argentine economy will continue to recover or will face a recession, and if there is a recession to what effect it will affect our operations in Argentina. In 2009, the Company reported for the first time the financial statements under IFRS and the functional currency is the Argentine peso for our Argentine subsidiaries. Fixed assets and their depreciation are considered in said currency and translated into Chilean pesos for consolidation purposes.

 

Argentina’s legal regime and economy are susceptible to changes that could adversely affect our Argentinean operations.

The measures taken by the Argentine government to address the Argentine economic crisis, which began in 1998, have severely affected the Argentine financial system’s stability and have had a materially negative impact on its reputation. If Argentina were to experience a new fiscal and economic crisis, the Argentine government could implement economic and political reforms, which could adversely impact our business. The unpredictability, timing and scope of possible measures enacted by the Argentine government, including expropriations, higher taxes and exchange control measures, could adversely affect our Argentinean operations and our future results of operations.

 

Since January 2006, the Argentine government has adopted different methods to directly and indirectly regulate the prices of various consumer goods, including bottled beer, in an effort to slow inflation. 

 

RISKS RELATING TO OUR BUSINESS

 

Fluctuations in the cost of our raw materials may adversely impact our profitability if we are unable to pass those costs along to our customers.

We purchase malt, rice and hops for beer, sugar for soft drinks, grapes for wine and packaging material from local producers or through purchases in the international market.  The prices of those commodities have experienced significant fluctuations over time and are determined by the global supply and demand for those commodities as well as other factors, such as fluctuations in exchange rates, over which we have no control.

 

Although we historically have been able to increase our selling prices in response to increases in raw material costs and thus have not sought to hedge our exposure to increases in raw material prices, we cannot assure you that our ability to recover increases in the cost of raw materials will continue in the future.  If we are unable to increase our selling prices in response to increases in raw material costs, any future increases may reduce our margins, if we could not improve efficiencies to offset them.

 

We are controlled by one majority shareholder, whose interests may differ from those of holders of our ADSs and this shareholder may take actions which adversely affect the value of a holder’s ADSs or common stock.

As of May 31, 2010, Inversiones y Rentas S.A., or IRSA, a Chilean closed corporation, owned directly and indirectly, 66.1% of our shares of common stock.  Accordingly, IRSA has the power to control the election of most members of our board of directors and its interests may differ from those of the holders of our ADSs.  IRSA also has a significant influence in determining the outcome of any corporate transaction or other matters submitted to our shareholders for approval, including mergers, consolidations, the sale of all or substantially all of our assets and going-private transactions.  In addition, actions by IRSA with respect to the disposition of the shares of common stock that it owns, or the perception that such actions may occur, may adversely affect the trading prices of our ADSs or common stock.

 

Competition in the Chilean beer market may erode our market share and lower our profitability.

In 2009, our market share of the Chilean beer market by volume was approximately 85%.  Our largest competitor in the Chilean beer market by volume is Cervecería Chile S.A., or Cervecería Chile, a subsidiary of Quilmes Industrial S.A., or Quilmes, the largest Argentine brewer and, a subsidiary of Companhia de Bebidas das Américas, or AmBev, since January 2007. Ambev and Interbrew merged in 2004, creating Inbev N.V./S.A. which merged with Anheuser Busch Cos, Inc on November 18, 2008, forming Anheuser-Busch InBev. We estimate that Cervecería Chile had a market share by volume in Chile of approximately 13% in 2009.  In the past, Cervecería Chile has engaged in aggressive price discounting.  If Cervecería Chile were to engage in aggressive price discounting in the future, we cannot assure you, given the current environment, that any such discounting or other competitive activities will not have a material adverse impact on our profitability.

 

Additionally, if business conditions in the beer market continue to be relatively favorable in Chile, other enterprises may attempt to enter the Chilean beer market either by producing beer locally or through imports.  We expect that additional competitors could erode our market share or lead to price discounting.

 

Our beer brands in Chile may face increased competition from other alcoholic beverages such as wine and spirits, as well as from non-alcoholic beverages such as soft drinks.

Beer consumption in Chile may be influenced by changes in domestic wine, spirits and/or other non-alcoholic beverages relative prices.  Increases in domestic wine prices have tended to lead to increases in beer consumption, while reductions in wine prices have tended to reduce or slow the growth of beer consumption. As a result of our lower market share in the Chilean wine, spirits and soft drinks markets as compared to the Chilean beer market, if beverage consumers were to shift their consumption from beer to either wine, spirits or soft drinks, we expect that it would adversely affect our profitability.

 

Quilmes dominates the beer market in Argentina and we may not be able to maintain our current market share.

In Argentina, we face competition from Quilmes, Cervecería Argentina S.A. and Isenbeck, a subsidiary of Warsteiner Brauerei Hans Cramer GmbH & Co., or Warsteiner. We estimate that in 2009 Quilmes had a market share of 75% and Warsteiner had a market share of 3%. We estimate that our market share of the Argentine beer market was 22% in 2009.  As a result of its dominant position in Argentina, Quilmes’ large size enables it to benefit from economies of scale in the production and distribution of beer throughout Argentina.  Therefore, we cannot assure you that we will be able to grow or maintain our current market share of the Argentine beer market.

 

Consolidation in the beer industry may impact our market share.

In January 2007, AmBev assumed control of Quilmes.  Additionally, on March 2004, AmBev and Interbrew announced an agreement to merge, creating the world’s largest brewer under the name InBev. Inbev and Anheuser Busch merged in November 2008, creating the world’s global beer leader.  In Chile, Quilmes sells its beer through Cervecería Chile, which had a market share of approximately 13% in 2009, and in Argentina which had a market share of approximately 75% in 2009. As a consequence of the referred merger, the brand Budweiser whose production and distribution license contract was granted to CCU Argentina until 2025, belongs to our competitor. Cervecera CCU Chile has a distribution contract until 2015 to distribute Budweiser in Chile. We cannot assure you that the contracts will be renewed.   

 

In 2005, SABMiller plc. merged with Grupo Empresarial Bavaria , a Colombian brewer with operations in Colombia, Peru, Ecuador and Panama, forming the then second largest brewer in the world.

Consolidation in the beer industry has resulted in larger and more competitive participants, which could change the current market conditions under which we operate.

 

Restrictions in the gas supply from Argentina have increased our energy costs and higher oil prices have increased our distribution expenses.

Since 2005, the Argentine government has restricted gas exports to Chile due to supply problems in that country.  This has increased the cost of operating our beer production plants in Chile and Argentina, as well as our soft drinks plants in Chile.  Additionally, these restrictions have increased electrical power costs related to these same gas restrictions.  We do not need additional investments because our boilers can work with gas or with alternative fuels, such as diesel oil or butane gas. The Chilean government is presently implementing a strategy to diversify energy supply. The construction in Quintero of the first plant to process imported GNL (liquefied natural gas), which started its operation in August 2009, brought relief to the energy issue.

Oil price increases may reduce our margins if we are unable to improve efficiencies or increase our prices to offset them.

 

We depend upon the renewal of certain license agreements to maintain our current operations.

Most of our license agreements include certain conditions that must be met during their term, as well as provisions for their renewal at expiry date.  We cannot assure you that such conditions will be fulfilled, and therefore that the agreements will be renewed, expire at end of term or undergo early termination.  Termination of, or failure to renew our existing license agreements could have an adverse impact on our operations.

 

Increase in negotiation power of some clients.

In recent years, the Chilean supermarket industry has gone through a consolidation process, increasing the importance and purchasing power of a few supermarket chains.  The importance of supermarkets is disclosed in each one of our business segments.

 

Dependence on a unique supplier for some important raw materials.

In the case of glass bottles, both in Chile and Argentina, we purchase most of our bottles from a unique local supplier.  In case of some problem with one of these suppliers we will need to use suppliers outside each country.

 

Water supply is essential to the development of our businesses.

Water is an essential component for beer, soft drinks and mineral water. While we have adopted policies for the responsible and sustainable use of water, a failure in our water supply could negatively affect our sales and profitability.

 

The supply, production and logistics chain is key to the timely supply of our products to consumer centers.

An interruption or a significant failure in this chain may negatively affect the Company’s results, if the failure is not quickly resolved.  An interruption could be caused by various factors, many of which are beyond our control.

 

Possible restrictions on the sale and promotion of alcoholic beverages in Chile.

Senators and congressmen from different political parties have submitted to Congress proposed bills to restrict the consumption, sale and promotion of alcoholic beverages.  The main modifications proposed in these bills are the incorporation of warnings on product labels of the possible dangers of excessive alcohol consumption on human health, similar to those required in the United States, restrictions on television advertising and a prohibition of alcoholic beverages at sports, cultural or related events.  If the proposed bills are passed, this could affect alcoholic beverage consumption and, as a consequence, could negatively affect our further business development.

 

Our businesses are taxed with different duties, particularly with excise taxes on the consumption of alcoholic and non-alcoholic beverages.

An increase in the rate of these taxes could negatively affect our sales and profitability.

 

Chilean peso fluctuations may affect our profitability.

Because we purchase some of our supplies at prices set in U.S. dollars, and export wine in U.S. dollars, euros and pounds, we are exposed to foreign exchange risks that may adversely affect our financial condition and results of operations.  Therefore, any future changes in the value of the Chilean peso against said currencies would affect the revenues of our wine export business, as well as the cost of several of our raw materials, especially in the beer and soft drink businesses where raw materials are purchased in U.S. dollars. The effect of the exchange rate variation on export revenues would always have an opposite effect on the cost of raw materials in Ch$ terms.

 

Increases in commodity prices may affect our profitability.

A significant part of our raw materials are commodities whose prices are subject to volatility caused by market fluctuations. These price fluctuations may not keep pace with the market conditions in which we operate, thus we may have limited capacity to raise prices to offset increases in costs. If we are unable to increase prices to offset costs increases, our profitability may be adversely affected.

 

If we are unable to maintain the image and quality of our products our financial results may suffer.

The image and quality of our products is essential for the success and growth of the Company. Problems with product quality could tarnish the reputation of our products and may adversely affect the Company’s revenues.

 

If we are unable to finance our operations.

A global liquidity crisis may eventually limit our ability to obtain the cash needed to fulfill our commitments. Sales could also be affected by a global disruption if consumption decreases sharply, placing stress in the Company’s cash position.

 

7

RISKS RELATING TO OUR ADSs

 

The price of our ADSs and the U.S. dollar value of any dividends will be affected by fluctuations in exchange conditions.

Our ADSs trade in U.S. dollars.  Fluctuations in the exchange rate between Chilean and Argentine currencies and the U.S. dollar are likely to affect the market price of our ADSs.  For example, since our financial statements are reported in Chilean pesos, a decline in the value of the Chilean peso against the dollar would reduce our earnings as reported in U.S. dollars.  Any dividend we may pay in the future would be denominated in Chilean pesos.  A decline in the value of the Chilean peso against the U.S. dollar would reduce the U.S. dollar equivalent of any such dividend.  Additionally, in the event of a dividend or other distribution, if exchange rates fluctuate during any period of time when the ADS depositary cannot convert a foreign currency into dollars, a holder of our ADSs may lose some of the value of the distribution.  Also, since dividends in Chile are subject to withholding taxes, which we retain until the following year when the exact amount to be paid is determined, if part of the retained amount is refunded to the shareholders, the amount received by holders of our ADSs would be subject to exchange rate fluctuations between the two dates.

 

A holder of ADSs may be subject to certain risks due to the fact that holders of our ADSs do not hold shares of our common stock directly.

In order to vote at shareholders’ meetings, if a holder is not registered on the books of the ADS depositary, the holder of our ADSs is required to transfer its ADSs for a certain number of days before a shareholders’ meeting into a blocked account established for that purpose by the ADS depositary.  Any ADS transferred to this blocked account will not be available for transfer during that time.  If a holder of our ADSs is registered on the books of the ADS depositary, it must give instructions to the ADS depositary not to transfer its ADSs during this period before the shareholders’ meeting.  A holder of our ADSs must therefore receive voting materials from the ADS depositary sufficiently in advance in order to make these transfers or give these instructions.  There can be no guarantee that a holder of our ADSs will receive voting materials in time to instruct the ADS depositary how to vote.  It is possible that a holder of our ADSs will not have the opportunity to exercise a right to vote at all.  Additionally, a holder of our ADSs may not receive copies of all reports from us or the ADS depositary.  A holder of our ADSs may have to go to the ADS depositary’s offices to inspect any reports issued.

 

Controls on foreign investment and repatriation of investments in Chile may adversely impact a holder of our ADSs ability to obtain and dispose of the shares of our common stock underlying its ADRs.

Equity investments in Chile by persons who are not Chilean residents are generally subject to exchange control regulations that restrict the repatriation of investments and earnings from Chile.  Our ADSs are subject to an ADR foreign investment contract among us, the depositary and the Central Bank of Chile which is intended to grant holders of our ADSs and the depositary access to Chile’s formal exchange market.  See “Exchange Rates”.  Pursuant to current Chilean law, our ADR foreign investment contract may not be amended unilaterally by the Central Bank of Chile.  However, we cannot assure you that additional Chilean restrictions applicable to holders of our ADSs, the disposition of underlying shares of our common stock or the repatriation of the proceeds from the disposition of the underlying common stock could not be imposed in the future, nor can we assess the duration or impact of the restrictions if imposed.  If for any reason, including changes to our ADR foreign investment contract or Chilean law, the depositary is unable to convert Chilean pesos to U.S. dollars, investors would receive dividends or other distributions in Chilean pesos.  Transferees of shares of our common stock withdrawn from the ADR facility will not be entitled to access the formal exchange market unless the withdrawn shares are redeposit with the depositary.  See “Item 10: Additional Information – Exchange Controls in Chile”.

 

A holder of our ADSs’ right to force us to purchase its underlying shares of our common stock pursuant to Chilean corporate law upon the occurrence of certain events may be limited.

In accordance with Chilean laws and regulations, any shareholder that votes against certain corporate actions or does not attend the meeting at which certain corporate actions are approved and communicates to the corporation its dissent in writing within the term established by law, may exercise a withdrawal right, tender its shares to the company and receive cash compensation for its shares, provided that the shareholder exercises its rights within the prescribed time periods.  See “Item 10: Additional

 

Information – Memorandum and Articles of Association – Rights, preferences and restrictions regarding shares”.  In our case, the actions triggering a right of withdrawal include the approval of:

 

·         our transformation into a different type of legal entity;

·         our merger with and/or into another company;

·         the transfer of 50% or more of our corporate assets, whether or not liabilities are also transferred, , to be determined according to the balance sheet of the previous fiscal year or the proposal or amendment of any business plan that contemplates the transfer of assets exceeding said percentage; the disposition of 50% or more of the corporate assets of a subsidiary, which represents at least 20% of the assets of the corporation, as well as any disposition of shares which results in the parent company losing its status as controller;

·         the granting of real or personal guarantees to secure third party obligations exceeding 50% of the corporate assets except when the third party is a subsidiary of the company (in which case approval of the board of directors will suffice);

·         the creation of preferences for a series of shares or the increase, extension or reduction in the already existing ones.  In this case, only dissenting shareholders of the affected series shall have the right to withdraw;

·         curing certain formal defects in our charter which otherwise would render it null and void or any modification of our by-laws that grant this right; and

·         other cases provided for by statute or in our bylaws, if any.

 

In addition, shareholders may withdraw if a person becomes the owner of two-thirds or more of the outstanding shares of the corporation as a consequence of a share acquisition and such person does not make a tender offer for the remaining shares within 30 days from the date of such acquisition.

 

Minority shareholders are also granted the right to withdraw when the controller acquires more than 95% of the shares of an open stock corporation.

 

Our bylaws do not provide for additional circumstances under which shareholders may withdraw.

 

Because of the absence of legal precedent as to whether a shareholder that has voted both for and against a proposal, such as the depositary of our ADSs, may exercise withdrawal rights with respect to those shares voted against the proposal, there is doubt as to whether a holder of ADSs will be able to exercise withdrawal rights either directly or through the depositary for the shares of our common stock represented by its ADSs.  Accordingly, for a holder of our ADSs to exercise its appraisal rights, it may be required to surrender its ADRs, withdraw the shares of our common stock represented by its ADSs, and vote the shares against the proposal.

 

Preemptive rights to purchase additional shares of our common stock may be unavailable to holders of our ADSs in certain circumstances and, as a result, their ownership interest in us may be diluted.

The Chilean Corporations Act requires us, whenever we issue new shares for cash, to grant preemptive rights to all holders of shares of our common stock, including shares of our common stock represented by ADSs, giving those holders the right to purchase a sufficient number of shares to maintain their existing ownership percentage.  We may not be able to offer shares to holders of our ADSs pursuant to preemptive rights granted to our shareholders in connection with any future issuance of shares unless a registration statement under the Securities Act is effective with respect to those rights and shares, or an exemption from the registration requirements of the Securities Act is available.

We intend to evaluate at the time of any future offerings of shares of our common stock the costs and potential liabilities associated with any registration statement as well as the indirect benefits to us of enabling U.S. owners of our ADSs to exercise preemptive rights and any other factors that we consider appropriate at the time, and then make a decision as to whether to file such a registration statement.  We cannot assure you that any registration statement would be filed.

 

To the extent a holder of our ADSs is unable to exercise its preemptive rights because a registration statement has not been filed, the depositary will attempt to sell the holder’s preemptive rights and distribute the net proceeds of the sale, net of the depositary’s fees and expenses, to the holder, provided

that a secondary market for those rights exists and a premium can be recognized over the cost of the sale.  A secondary market for the sale of preemptive rights can be expected to develop if the subscription price of the shares of our common stock upon exercise of the rights is below the prevailing market price of the shares of our common stock. Nonetheless, we cannot assure you that a secondary market in preemptive rights will develop in connection with any future issuance of shares of our common stock or that if a market develops, a premium can be recognized on their sale.  Amounts received in exchange for the sale or assignment of preemptive rights relating to shares of our common stock will be taxable in Chile and the United States.  See “Item 10: Additional Information – Taxation – Chilean Tax Considerations – Capital Gains” and “– United States Tax Considerations – Capital Gains”.  If the rights cannot be sold, they will expire and a holder of our ADSs will not realize any value from the grant of the preemptive rights.  In either case, equity interest in us will be diluted proportionately.

 

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CAPITAL EXPENDITURES

The capital expenditures figures for 2008 and 2009 shown below correspond to the application of IFRS and reconcile to the Cash Flow as shown in the Consolidated Statements of Cash Flows. Our capital expenditures for 2008 and 2009 were Ch$60,685 million and Ch$57,892 million, respectively, totaling Ch$118,577 million, of which Ch$44,126 million were invested in our beer operations in Chile, Ch$16,742 million in our Argentine beer operations, Ch$32,517 million in our non-alcoholic beverages operations, Ch$7,590 million in our wine operations, Ch$2,572 million in our spirits operations and Ch$15,030 in other investments, mostly in warehouses and molds, during the years mentioned above.

 

In recent years, our capital expenditures have been made primarily for the expansion of our production and bottling capacities, additional returnable bottles and crates, marketing assets (mainly coolers), and  improvement in management information systems, among others.

 

In Chile, during 2008, capital expenditures were incurred in our beer division mainly on capacity expansion, new packaging, improvements and change of equipment, marketing assets, and implementation of a new filtration plant and an alcohol free beer plant. In Argentina, our capital expenditures were primarily in marketing assets, new packaging and the enhancement of the Luján new plant mainly for the production of Heineken beer. Capital expenditures were made in our soft drink division, mainly for new packages, new packaging lines for returnable glass and PET purified water, marketing assets and equipment improvement. As for our wine operations, we invested primarily in the procurement of equipment, tanks, remodeling of the Molina plant, new irrigation technology and land. In our spirits business, the main expenditures were the completion of construction, procurement of equipment and start up of the new plant in Ovalle, as well as the continued improvement of the effluent treatment process. Other significant capital expenditures in 2008 relate to the acquisition of land for the construction of distribution centers and warehouses and the upgrade of information systems.

 

During 2009, capital expenditures in our Chile beer division were focused principally on capacity expansion, new packaging and cranes, improvements and new equipment acquisitions and marketing assets.  In Argentina, our capital expenditures were primarily for marketing assets, new packaging and new equipment. Capital expenditures were incurred in our non-alcoholic beverage division mainly for new packaging, marketing assets and new equipment mostly dedicated to the water business.  Regarding our wine operations, the merger with Viña Tarapacá in late 2008 required several equipment optimizations; capacity improvement, new technology on irrigation, new land and new barrels were the main expenses.  In our spirit business, the completion of the facility in Ovalle, as well as environmental improvements and the equipment for the new category were the most relevant investments.

 

Our principal capital expenditures for the period 2008-2009 are displayed in the following table. See “Capital Expenditures Commitments” in Item 5 for the period 2010-2013.

 

 

Business Overview

 

Summary

We are mainly a diversified beverage company operating principally in Chile and Argentina.  We are the largest brewing group in Chile, the second largest brewing group in Argentina, the third largest soft drinks producer in Chile, after the two largest Coca-Cola bottlers in Chile, the largest mineral water and bottled nectar producers in Chile, the third largest wine producer in Chile, the second largest wine exporter, the second largest pisco producer in Chile and also we participate in the purified water, rum and sweet snacks industries in Chile.  Our beer and soft drink products include a wide range of proprietary, licensed and imported brands.

 

In 2009, we had consolidated net sales of Ch$776,544 million, of which 35.8% was accounted for by our beer sales in Chile, 17.7% by our beer sales in Argentina, 25.9% by our non-alcoholic beverages sales in Chile, 16.1% by wine sales, 5.0% by spirits sales and the remainder by sales of other products and consolidation eliminations.

 

Beer.  We estimate that our share of the Chilean beer market by volume was approximately 86% for the years 2007 and 2008, and 85% in 2009.  Our line of beers in Chile includes a full range of super-premium, premium, medium-priced and popular-priced brands of alcoholic and non-alcoholic beer, which are primarily marketed under seven different proprietary brands and four brand extensions. Our flagship brand, Cristal, is Chile’s best selling beer, accounting for an estimated 51% of our 2009 beer sales by volume in Chile.  We are the only brewery in Chile with a nationwide production and distribution network.  In addition, we are the exclusive producer and distributor in Chile of Heineken beer, the exclusive distributor in Chile of imported Budweiser beer and the exclusive local producer and importer of Paulaner beer.  We also distribute and produce, under license, Austral beer.

 

We entered the Argentine beer market in 1995 by acquiring two breweries and their brands, CICSA and CSF.  Additionally, in 1998, we bought the brands and assets of Cervecería Córdoba.  Under a joint venture agreement entered into with Anheuser-Busch in 1995, we began importing, selling and distributing Budweiser beer in Argentina in March 1996.  We began production and distribution of locally produced Budweiser beer in Argentina in December 1996 as part of our strategy to develop Budweiser as the flagship brand of our Argentine operations.  In April 2008, we bought ICSA and as a result added to our portfolio the brands Palermo, Bieckert and Imperial.  In addition, we are the exclusive producer and distributor in Argentina of Heineken brand beer and the exclusive distributor in Argentina of imported Corona, Kunstmann, Negra Modelo, Birra Moretti, Paulaner and Guinness beer brands.  Currently, we and Anheuser-Busch have 95.9% and 4.1%, respective interests, in our Argentine subsidiary, CCU Argentina.  We estimate that our market share by volume of the Argentine beer market was approximately 16% in 2007, 21% in 2008, and 22% in 2009, according to CICA.

 

Non alcoholic beverages.  We produce and sell carbonated soft drink, mineral water, purified water, nectar, sports and energy drinks and tea products in Chile, including our proprietary brands and brands produced under license from PepsiCo, Schweppes Holdings Ltd., Promarca and Nestlé Chile S.A..  The most relevant beverages in this segment are soft drinks: carbonated beverages, –cola and non-cola– and non carbonated beverages, mostly fruit juices in different degrees of concentration. The various types of water products are also important: mineral water – both, sparkling and still–, and purified water. We estimate that our Chilean soft drinks market share by volume, not including nectars, was approximately 19% in 2007, 19% in 2008 and 20% in 2009 and that our mineral water market share by volume was 63% in 2007, 61% in 2008 and 62% in 2009.

 

Wine.  We entered the Chilean wine industry in 1994 with the acquisition of a 48.4% interest in VSP (today VSPT), Chile’s third largest player in the domestic market and second largest wine exporter.  After making subsequent investments and pursuant to the merger of VSP and VT resulting in VSPT, our affiliate Inversiones CCU S.A. as of May 2010 has a 50.01% interest in VSPT. VSPT is formed by 7 different wineries in Chile, 2 in Argentina and Viña Valles de Chile, a non-consolidating subsidiary. The wine group  produces and markets a full range of wine products for both the domestic and export markets.  We believe that in 2009, VSPT’s sales by volume amounted to approximately 23% of total measured domestic industry sales by volume and 12% of Chile’s total wine export sales by volume, excluding bulk wine, according to our estimates and those of the Wineries of Chile Association. VSPT’s main vineyards are located in all main viticulture Chilean valleys, including Maipo, Curicó, Casablanca, Leyda, Colchagua, Elqui, Cachapoal and Maule valleys.  VSPT’s domestic wine products are distributed through our nationwide distribution system with dedicated sales forces in the major cities and its export products are sold in over 80 different countries through distribution agents.

 

Spirits.  In February 2003, we began the sale of a new product for our beverage portfolio, pisco, under the brand Ruta Norte.  Pisco is a grape spirit very popular in Chile that is produced in the northern part of the country and the southern part of Peru.  Our pisco was produced in the Elqui Valley in the IV Region of Chile and it was sold throughout the country by the beer division sales force.  In March 2005, we entered into an association with the second largest pisco producer at that time, Control.  This new joint venture was named Compañía Pisquera de Chile S.A., or CPCh, to which the companies contributed principally with assets,

commercial brands and – in the case of Control – also some financial liabilities.  Currently we own 80% of Compañía Pisquera de Chile and Control owns the remaining 20%.  According to Nielsen numbers, Compañía Pisquera de Chile has 44% market share of the Chilean pisco industry.  In May 2007, we added a new spirit category, rum, through our subsidiary CPCh under the brand name Sierra Morena. We ended the year 2009 with a rum market share of 13% as per Nielsen. In 2009 CPCh introduced a new category with the brand Mistral Ice Premium Blend.

 

Sweet snacks. In January 2004, we entered the sweet snacks business by means of a joint venture between our subsidiary ECUSA (currently, this investment belongs to our subsidiary CCU Inversiones S.A.) and Empresas Lucchetti S.A. (currently, Industria Nacional de Alimentos S.A.), a subsidiary of Quiñenco.  Each company acquired a 50% interest in Calaf S.A. (which has been renamed “Foods Compañía de Alimentos S.A.”), a corporation that acquired the trademarks, assets and know-how, among other things, of Calaf S.A.I.C. and Francisca Calaf S.A., traditional Chilean candy makers that have been in business for more than a century. The Company bought the brand Natur in 2007 and 50% of Alimentos Nutrabien S.A. in 2008. The three brands (Calaf, Natur and Nutrabien) are consolidated in Chile and allowed us to target a variety of snacks to specific niches.  We now sell Food’s products using CCU’s network: Commercial CCU sells from Arica to Copiapó/Vallenar in the northern part of the country and from Talca/Curicó to Coyhaique in the south; Comercial Patagona sells in Punta Arenas; ECUSA’s sales and logistics platform is used in the central part of the country and as of December 2009, Foods had a 15 people dedicated sales force to serve 43 supermarkets representing 663 sales points throughout the country. This marketing structure has the capacity to reach more than 108,000 clients. Our challenge for the next development stage is to leverage our distribution and selling strengths and to search for future growth opportunities.  

 

Distribution Network.  In Chile, we have an extensive and integrated distribution network for the sale and distribution of beer, soft drinks, mineral water, purified water, functional beverages, nectars, wine, pisco, rum and sweet snacks products with capacity to reach approximately 108,000 customers. The network includes a total of 19 owned or leased warehouses and a network of independent transportation companies handled by Transportes CCU. Sales are performed by categories dedicated sales forces and by Comercial CCU which has a sales force of approximately 307 people who sell our products to approximately 48,302 customers in the North of Chile from Arica to Copiapó/Vallenar and in the mid-south area from Curicó/Talca through Coihayque, except for Concepción City. In the far south of Chile, in Punta Arenas, Comercial Patagona does the selling for all products, reaching 733 customers. In the central parts of the country and the City of Concepción, there are dedicated sales forces that focus on single lines of products. Product distribution is carried out by Transportes CCU throughout the country or by Comercial Patagona in its territory.

 

In Argentina, our sales and distribution network for our beer products consists of six owned or leased warehouses, a direct sales force and 3 logistics operators reaching approximately 49,798 customers plus 45 supermarket chains (10 national and 35 regional supermarket chains) Sales are done by 2 independent bottlers in the south and north of Argentina.

 

 

Our Beer Business

 

Our historical core business, our Chilean beer operation, was first established in 1850.  Since that date, our management believes we have played a leadership role in the industry, with a business that in 1902, after the merger of different breweries, gave rise to our formation.  In 1995, we began building our presence in Argentina through the acquisition of a majority interest in two Argentine brewing companies, CICSA and CSF.

 

16

Our Beer Business in Chile

 

Overview. We estimate that annual beer consumption in Chile was 602 million liters in 2009, or approximately 36 liters per capita.  The following chart shows our estimates for total and per capita consumption levels for beer in Chile for the years 2005 - 2009:

 

 

We estimate that the total beer market decreased by approximately 0.2% in terms of volume sold during 2009 as compared to 2008, after growing on average 7.8% per year between 2005 and 2008. We believe that the positive growth of the beer market in the period of five years (5.8% per year on average) is the result of the actions taken by us since 2001 to increase beer consumption in Chile with new products, new packaging and by creating new occasions for consumption, in addition to positive Chilean economic conditions. The market decrease in 2009 is primarily a result of  the effects in Chile of the global financial crisis  which led to increased unemployment and consumption slowdown.

 

Virtually all of the beer consumed in Chile is produced by three Chilean manufacturers: us, Cervecería Chile and Cervecería Austral whose principal brands of beer in Chile are Cristal, Báltica and Austral, respectively.  According to our estimates, during 2009, we and Cervecería Chile accounted for approximately 85% and 13% of total beer sales in Chile, respectively.  In November 2000, we acquired a 50% stake in Cervecería Austral, located in the city of Punta Arenas.  This brewery has an annual nominal production capacity of 5.7 million liters and had less than 1% market share during 2009.  In October 2001, Cervecería Austral entered into a license agreement with our subsidiary, Cervecera CCU Chile Limitada, to produce and sell our brand Cristal, and also any other brand, owned by or licensed to Cervecera CCU Chile Limitada in the southern part of Chile.  During 2003, Cervecería Austral began the production and sale of our brands Cristal, Escudo and Dorada 6.0.  In May 2002, we acquired a 50% stake in Compañía Cervecera Kunstmann S.A., located in the city of Valdivia. In November 2006, we acquired additional shares of Kunstmann that allowed us to consolidate this subsidiary into our financial statements since that month. Due to the high costs of shipping beer to Chile and Chile’s returnable glass bottle system, sales of imported beer are not significant, representing an estimate of 2% of total beer industry volume in 2009.

 

Wholesale and retail beer prices are not regulated in Chile.  Wholesale prices are subject to negotiation between the producer and the purchaser.  Retailers determine retail prices to the final consumer.  We believe that the key factors determining retailers’ prices include: national and/or local price promotions offered by the manufacturer, the nature of product consumption (on-premise or take-out), the type of packaging (returnable or non-returnable), the applicable tax structure, the desired profit margins and the geographical location of the retailer.

 

Beer Production and Marketing in Chile.  The production, marketing and sales of beer in Chile are our principal activities, generating net sales of Ch$270,058 million, and Ch$278,170 million or 38% and 35.8% of our total net sales in 2008 and 2009, respectively.  Our sales of beer by volume in Chile decreased 1.9% in 2009 primarily as a result of the global financial crisis experienced in 2009.

 

The following table shows our proprietary brands, brands produced under license and brands imported under license for the Chilean market:

 

 

 

Cristal is our principal and best selling beer brand in Chile. Cristal Black Lager is a brand extension of Cristal, which was launched in April 2007. Cristal Cer0,0° was introduced in December 2008 and it is an alcohol free beer with regular beer-like taste.  Escudo, Chile’s second most popular beer, is targeted to young-adult consumers.  Royal Guard is our single, proprietary, super-premium brand. Royal Light is a light beer extension of the Royal Guard line and contains a lower alcohol content.  Morenita is a dark beer and Dorada 6.0 is a discount brand.  Lemon Stones is a lemon flavored sweetened beer, with 2.5% alcohol content. 

 

During 2008, we exported 0.5 million liters of beer from Chile.  Although we continually explore export opportunities, we do not expect beer exports to be a significant source of sales in the future since our primary focus is on the Chilean domestic market.

 

On April 28, 2003, we, through our subsidiaries Cervecera CCU Chile Limitada and Compañía Cervecerías Unidas Argentina S.A., and Heineken Brouwerijen B.V. signed license and technical assistance agreements which provide us with the exclusive rights to produce, sell and distribute Heineken beer in Chile and Argentina commencing June 18, 2003.  These agreements have an initial term of 10 years beginning in June 2003, renewable for subsequent periods of five years.  Heineken beer is the leading brand in the super-premium segment, the beer segment with the highest growth in Chile in recent years.

 

Additionally, we produce, bottle and distribute Paulaner beer under license from Paulaner Brauerei AG, which is controlled by the BrauHolding International GmbH Group, a joint venture between Heineken and the Schörghuber Group. The current Import and License agreement, executed in 1995, which supersedes all prior agreements, provides us with the exclusive right to produce in Chile super-premium beer under the Paulaner label and distribute in Chile a variety of additional imported Paulaner products. It has a five year term, beginning in May 1995, automatically renewable for successive five-year periods unless otherwise stated by any party.  The Schörghuber Group was, until April 2003, one of the two beneficial shareholders of IRSA, our major shareholder.

 

In October 1996, we and Anheuser-Busch entered into an agreement granting us the exclusive right to distribute Budweiser beer in Chile.  During 2004, we and Anheuser-Busch entered into a new distribution agreement, with a 12-year term, ending December 2015.  See “Item 3: Key Information – Risk Factors”.

 

In October 2001, we signed a license agreement with Cervecería Austral S.A. for the production of the Austral brand by our beer division.  This agreement has a fourteen-year term, automatically renewable for a seven-year term if certain conditions are fulfilled.  This agreement can be extended for an additional seven-year period if both parties express this intention in writing.

 

In May 2002, we acquired a 50% ownership interest in Compañía Cervecera Kunstmann S.A., a microbrewery located in the southern city of Valdivia, with an annual production capacity of 3 million liters at that time.  Since June 2003, our beer division began selling Kunstmann nationwide.  In November 2006, we acquired additional shares of Kunstmann that allowed us to consolidate this subsidiary.

Our investment in Cervecería Austral S.A., the production of the Austral brand by our beer division, the investment in Compañía Cervecera Kunstmann S.A., plus the production of Heineken beer since June 2003, are part of our strategy to increase our presence in the premium segment of the Chilean beer market.

 

Our beer products sold in Chile are bottled or packaged in returnable and non-returnable bottles, aluminum cans or stainless steel kegs at our production facilities in the Chilean cities of Santiago and Temuco, and in  Antofagasta until July 2009.  During 2007, 2008 and 2009, we sold our beer products in Chile in the following packaging formats:

 

We obtain all of our glass bottles and cans from third party suppliers.  See “– Raw Materials”.

 

We directly distribute our beer products throughout Chile to:

·         off-premise retail: small and medium sized retail outlets, which in turn sell beer to consumers for take-out consumption;

·         on-premise retail: retail establishments such as restaurants, hotels and bars for on-premise consumption;

·         wholesalers; and

·         supermarket chains.

 

In 2007, 2008 and 2009, the percentage mix of the above distribution channels for our beer products in Chile was as follows:

 

 

As of December 31, 2009, we had more than 38,000 customers in Chile for our beer products, none of which accounted for more than 2% of our total beer sales by volume, with the exception of two large supermarket chains that represented a combined total of 13%.  During 2009, the Chilean supermarket industry continued to consolidate, increasing the importance and purchasing power of a few supermarket chains. We do not maintain any long-term contractual arrangements for the sale of beer with any of our customers in Chile.

 

The following table sets forth our beer sales volume in Chile, by category, during each of the last five years:

 

 

            

The above figures do not include export sales to third parties, which amounted to 3.2, 0.5 and 1.5 million liters in 2007, 2008 and 2009 respectively.

 

The average price per liter to our customers for beer products in Chile increased from an average of Ch$517.88 in 2008 to Ch$548.96 in 2009 or 6%.

 

Our beer production in 2009 was centralized in the Santiago and Temuco plants in addition to the bottling facility in Antofagasta where we bottled beer until July 2009.  The Temuco plant commenced production in November 1999, replacing the closed Concepción and Osorno plants. For a more detailed discussion of our capital expenditure program, see “– History and Development of the Company – Capital Expenditures”.

 

Raw Materials and other Supplies. The principal raw materials used in our production of beer are malt, rice, water and hops.  We obtain our supply of malt from local producers and in the international market. In 2007, we renewed and signed long-term contracts with local producers for approximately 40% of our requirements.  The balance for 2010 is expected to continue to be imported, from Argentina and Uruguay.  During 2009, we received 36,000 tons of malt from Argentina and Germany, representing 100% of our imports.  Rice is obtained from local and international suppliers in spot transactions and/or annual contract agreements.  We pre-treat rice in order to ensure that it meets our standards of quality.  We import hops mainly pursuant to contracts with international suppliers, in the United States, which permit us to secure supplies for periods of up to four years.

 

Water is essential in the production of beer.  We obtain all of our water from wells located at our plants and/or from public utilities.  The water is treated at facilities located at our plants to remove impurities and to adjust the characteristics of the water before it is used in the production process.

 

We maintain testing facilities at each of our plants and factories where raw materials are tested.  Additionally, samples of beer are analyzed at various stages of production to ensure product quality.  Samples of Heineken are periodically sent to Holland to verify the quality of the product.

 

We generally purchase all of the glass bottles used in packaging our beer from the major national glass supplier in Chile, Cristalerías Chile S.A. under one-year agreements.  In addition, other sources, principally in Argentina, can be used when price and delivery terms are favorable.  During 2009, all of our requirements for aluminum cans were purchased from a local supplier, Rexam Chile S.A., formerly Latasa Chile S.A., but if price and delivery conditions are favorable, cans can be imported.  Our kegs used for draft beer, are purchased from various suppliers outside Chile.  We obtain the labels for our beer products principally from local suppliers. Plastic caps are principally purchased from two suppliers in Chile. Crowns are currently imported from Brazil and Mexico after our local supplier went out of business.

 

Prices of principal raw materials used in beer production in Chile are tied to the U.S. dollar and have varied in Chilean pesos because of general commodity price increases in international markets as well as for the variation of the Chilean peso against the U.S. dollar. From time to time, prices of agricultural products vary depending on demand and supply factors.

 

We believe that all of the contracts or other agreements between us and third party suppliers, with respect to the supply of raw materials for beer products, contain standard and customary commercial terms and conditions.  We do not believe we are dependent on any one supplier for a significant portion of our important raw materials. During the past ten years, we have not experienced any material difficulties in obtaining adequate supplies of necessary raw materials at satisfactory prices, nor do we expect to in the future.

 

Sales, Transportation and Distribution.  We distribute all of our beer products in Chile directly to retail, supermarket and wholesale customers.  This system enables us to maintain a high frequency of contact with our customers, obtain more timely and accurate marketing-related information, and maintain good working relationships with our retail customers.

 

In October 2005, we launched Comercial CCU S.A., a subsidiary in charge of a single sales force dedicated to selling our beverage and sweet snack products, in order to capture synergies and focus on sales 

 

 

 

Table of Contents

Year		Quarter		Sales Volume		% of Annual
				(millions of liters)		Sales Volume
2007		1st quarter		145.1		29.6
		2nd quarter		88.1		17.9
		3rd quarter		100.7		20.5
		4th quarter		157.2		32.0
		Total		491.1		100.0
2008		1st quarter		156.9		30.4
		2nd quarter		91.2		17.7
		3rd quarter		107.3		20.8
		4th quarter		161.4		31.2
		Total		516.8		100.0
2009		1st quarter		150.7		29.7
		2nd quarter		94.7		18.7
		3rd quarter		102.2		20.1
		4th quarter		159.6		31.5
		Total		507.2		100.0

 

21

 

Table of Contents

 

Year		Our Chilean Market Share for Beer (*)
2005		87%
2006		86%
2007		86%
2008		86%
2009		85%
(*) Considers beer sold directly by Austral and Kunstmann

22

 

Table of Contents

 

Year		Volume		Per Capita (*)
		(in millions of liters)		(liters)
2005		1,389		36
2006		1,472		38
2007		1,571		40
2008		1,716		43
2009		1,719		43
(*) Population estimated based on Argentina’s national census of 2001.

23

Beer Production and Marketing in Argentina.  Our beer operation in Argentina generated net sales of Ch$115,187 million and Ch$137,296 million representing 16.2% and 17.7% of our total net sales in 2008 and 2009, respectively.  The increases during this period were the result of higher prices and volumes, as a consequence of a favorable economic environment in Argentina.

 

We produce and market super-premium, premium, medium-priced and popular-priced beer brands in Argentina.  The following table shows our principal brands produced and imported under license in Argentina:

 

 

Schneider is our principal proprietary brand in Argentina, accounting for 23.4% of our Argentine sales volume in 2009.  We began local production of Budweiser brand beer in December 1996.  Budweiser beer represented 26.8% of our Argentine sales volume in 2009.  Since February 2002, our Budweiser one-liter returnable bottle, the main format in the market, has been priced at the same level as the leading brand in the market. According to Nielsen, during 2009 the price was 3 to 5% higher than the market leading brand.  In June 2003, we began selling locally produced Heineken beer. Our Schneider brand is sold in three varieties, regular lager, dark and Schneider Fuerte 6.0°, a brand extension with 6.0% of alcohol; the Salta brand is sold in regular and dark varieties, and the Santa Fe and Córdoba brands are sold only as regular lager. During 1997, we began to import Guinness beer from Ireland, making Argentina the only country in South America where Guinness draught is sold.  During 2001, we began importing Corona beer from Mexico, and during 2005 and 2007, we also began importing Negra Modelo beer from Mexico and Paulaner beer from Germany. In April 2008 we bought the brands Imperial, Palermo and Bieckert along with the production facility in Luján. In 2009 we introduced Otro Mundo and the imported Birra Moretti. During 2009, we exported 15.9 million liters of beer from Argentina to third countries, representing 4.1% of CCU Argentina’s beer sales volume.

 

Our beer products are bottled or packaged in returnable and non-returnable glass bottles, aluminum cans, or stainless steel kegs at our production facilities.  During 2007, 2008 and 2009, we sold our beer products in Argentina in the following packaging formats:

 

 

In Argentina, though most beer is sold to wholesalers, we also sell our products to retailers and supermarket chains. In 2007, 2008 and 2009, the percentage mix of the above distribution channels for our beer products in Argentina was as follows:

 

 

In 2009, we sold directly to approximately 49,798 customers in Argentina, none of which individually accounted for more than 3% of our total beer sales by volume, with the exception of two large distributors that represented a combined total of 20%. In total, we have 158,000 sales’s points covered by our direct and indirect sales force.

 

The following table sets forth our beer sales volume in Argentina by category during each of the last five years, including exports to third countries:

 

 

The average price in Chilean pesos, to our customers for our beer products in Argentina increased 15.1% in 2009, from Ch$297 per liter in 2008 to Ch$342 per liter in 2009. The increase in average prices is primarily explained by a higher participation of super-premium and premium brands in the sales mix and by currency conversion effects.

 

The license agreement between CCU Argentina and Anheuser-Busch, which provides CCU Argentina with the exclusive right to produce, package, market, sell and distribute Budweiser beer in Argentina and Uruguay, had an initial term of 20 years commencing in December 1995, which in March 2008, was extended to December 2025.  Among other things, the license agreement includes provisions for both technical and marketing assistance from Anheuser-Busch.  Under the license agreement, CCU Argentina is obligated to purchase certain raw materials from Anheuser-Busch or from suppliers approved by Anheuser-Busch.  CCU Argentina cannot produce, package, sell or distribute within Argentina any North American beer, other than Budweiser beer, without the prior written consent of Anheuser-Busch.  We began distribution of our locally produced Budweiser in December 1996.  See “– Sales, Transportation and Distribution”.  In addition, the license agreement is subject to certain specified market share targets and marketing expenditures.  During the third quarter 2000, we and Anheuser-Busch signed an export agreement to supply Budweiser from Argentina to Paraguay, Chile and Brazil.  In August 2003, the license agreement was modified, with regard to certain targets, to adjust it to the current economic situation of the Argentine market.  See “Item 3: Risk Factors”.

 

On April 28, 2003, CCU Argentina and Heineken Brouwerijen B.V., a subsidiary of Heineken International B.V., signed license and technical assistance agreements which provide us with the exclusive rights to produce, sell and distribute Heineken beer in Argentina commencing June 18, 2003.  These agreements have an initial term of 10 years beginning in June 2003, renewable for subsequent periods of five years.  Heineken beer is the second brand in the super-premium segment in Argentina.

 

In October 2006, we signed a long-term contract with ICSA to brew, bottle and package beer in the former AmBev plant in Luján, near Buenos Aires, that was purchased by ICSA.  In January 2007, we began brewing our local brands in this plant, obtaining enough production capacity to ensure future growth.  In April 2008, we acquired ICSA, including the Luján plant and the brands Imperial, Bieckert and Palermo. ICSA also 

 

 

had a brewing contract agreement with AmBev and, under such contract CICSA brewed beer for AmBev during the peak demand season of 2008-2009.

 

Raw Materials and other Supplies. The principal raw materials used in the production of our beer products in Argentina are malt, corn syrup, rice, water and hops.  During 2009, we continued obtaining malt and rice from regional suppliers, benefiting from lower costs as compared to imported materials.  We obtain rice from suppliers in Argentina and Uruguay, and malt and corn syrup from suppliers in Argentina.

 

Other raw materials are obtained from local and international suppliers in spot transactions and/or annual contracts.  All purchased raw materials are tested in order to ensure that they meet our standards of quality.

 

Water is essential in the production of beer.  Our operation in Salta obtains all of its water from wells located at its plant, and the Santa Fe operation obtains all of its water from the Paraná river. The Luján operation obtains its water from the Napa Puelche., an underground sheet of water. The water is treated at facilities located at our plants to remove impurities and adjust the characteristics of the water before it is used in the production process.

 

We maintain testing facilities at each of our plants and factories in which raw materials are analyzed according to our standards.  Additionally, samples of beer are analyzed at various stages of production to ensure product quality.  Samples of Heineken and Budweiser are periodically sent to Holland and to Anheuser-Busch facilities in the United States, respectively, to verify the consistency and quality of the products.

 

We generally purchase all of our glass bottles from the major national glass supplier in Argentina, Rigolleau/Cattorini, and from Saint Gobain in Brazil.  During 2009, all of our requirements for aluminum cans were purchased from a local supplier, Rexam Argentina S.A. Kegs used for draft beer are purchased from various suppliers in Europe.  Plastic storage and carrying crates, as well as the labels for beer products and crowns, are obtained from local and international suppliers.

 

Prices of principal raw materials used in beer production in Argentina have decreased in dollar terms. However, from time to time, prices of agricultural products vary depending on demand and supply factors.

 

We believe that all contracts or other agreements between us and third party suppliers, with respect to the supply of raw materials for beer products, contain standard and customary commercial terms and conditions.  We do not believe we are dependent on any one supplier for a substantial portion of our raw materials in Argentina.  We have not experienced any significant difficulties in obtaining adequate supplies of necessary raw materials at satisfactory prices and do not expect to in the future.

 

Sales, Transportation and Distribution. After production, bottling and packaging, our beer is either stored at the production facilities or transported to a network of six warehouses leased or owned by us.  Beer products are generally shipped to those warehouses, which are located within the region in which the beer products are sold.

 

Most of our beer in Argentina is sold and distributed through third party sales and distribution chains in the regions surrounding the cities of Santa Fe, Salta, Córdoba, Rosario and Buenos Aires.  In recent years, we reduced the number of our distributors and replaced some of them by larger ones, among which there are currently three bottlers, one in the south, another one in the north and the third one in the northeastern regions of Argentina.  As of December 31, 2009, we had a direct sales force which sold our beer products to approximately 49,798 customers within the Salta, Santa Fe, Córdoba, Rosario, the Federal Capital and its outlying metropolitan area, in addition to 45 regional and national supermarket chains throughout the country.

 

Our Argentine beer customers either make payments for our products in cash at the time of delivery or through one of our various credit arrangements.  Payment on credit sales is currently due 7 days from the date of delivery to wholesalers, and an average of 60 days of delivery to supermarkets. Credit sales accounted for 61%, 64% and 62% of our beer sales in Argentina in 2007, 2008 and 2009, respectively.  Losses on credit sales of beer in Argentina have not been significant.

 

Seasonality.  As a result of the seasonality of the beer industry, our sales and production volumes are normally at their lowest in the second and third calendar quarters and at their highest in the first and fourth quarters (i.e., those months corresponding to the summer and holiday seasons in Argentina).The following table shows the annual sales volume of beer in Argentina, including exports, during each quarter in 2007, 2008 and 2009:

 

Geographical Markets.  Our beer production facilities in Argentina are located in Santa Fe, Salta and Luján.  Santa Fe and its surrounding areas account for approximately 8.2% of the population of Argentina and for approximately 10.8% of total beer sales of CCU Argentina by volume in 2009. The region surrounding and including the cities of Salta and Jujuy account for approximately 4.9% of the population of Argentina and for approximately 6.7% of total beer sales of CCU Argentina by volume in 2009. The region surrounding and including the city of Córdoba accounts for approximately 8.5% of the Argentine population and represents approximately 9.9% of CCU Argentina’s sales by volume. Lastly, the province of Buenos Aires accounts for approximately 44.6% of the population of Argentina and for approximately 34.2% of total beer sales of CCU Argentina by volume in 2009.

 

Competition.  Since 2003, after the agreement between Quilmes and AmBev, the Argentine beer market consisted of three principal brewing groups: AmBev-Quilmes, us and  Warsteiner.  The principal proprietary brands of these companies are Quilmes, Schneider and Isenbeck, respectively.  In December 2006, ICSA, a new competitor, entered the Argentine beer market.  ICSA began its operations at the former AmBev brewery in Luján producing three beer brands: Palermo, Bieckert and Imperial, which had previously belonged to Quilmes.  These assets were sold by AmBev-Quilmes in response to requirements of the antitrust authorities in Argentina.  According to the information made public by our competitors and our estimates for Isenbeck, the different brewing groups had the following market shares in 2009: AmBev-Quilmes, 75%; us, 22%; and Warsteiner, 3%.

 

The following table shows our market share in the Argentine market over the past five years:

 

 

27

 

Quilmes, the beer market leader in Argentina and our principal competitor, also has beer operations in Chile, Paraguay, Uruguay and Bolivia.  In February 1997, Quilmes purchased Bieckert in Argentina, and, as a result of that acquisition, increased its production capacity by approximately 170 million liters, increasing its market share by an estimated 4.9%.  As of December 31, 2009, Quilmes had five breweries in Argentina with an estimated total annual production capacity of 1.2 billion liters.  Quilmes’ large size enables it to benefit from economies of scale in the production and distribution of beer throughout Argentina.

 

We estimate that Quilmes’ average market share in 2009 decreased to 75% from 82% market share in late 1994.  At that time, Companhia Cervejaria Brahma, one of the two largest beer producers in Brazil, commenced production at its new brewery in Luján, near Buenos Aires.  In addition, Warsteiner, a large German brewer, commenced production at its new brewery in Zárate, also near Buenos Aires, with an annual production capacity estimated to be approximately 140 million liters.  Prior to commencing production in Argentina, Companhia Cervejaria Brahma and Warsteiner competed in the Argentine market with imported beer.  The other competitor, Galicia, has one plant with a total annual capacity of approximately 17 million liters.  In July 1999, the merger of Companhia Cervejaria Brahma and Companhia Antarctica Paulista was announced, creating AmBev.  This merger was finally approved in March 2000, creating one of the largest beverage producers in the world.

 

More recently, in May 2002, AmBev and Quilmes announced that pursuant to an agreement between both parties, AmBev would transfer all of its beer assets in Argentina, Bolivia, Paraguay and Uruguay to Quilmes in exchange for 26.4 million new B shares of Quilmes.  Additionally, according to the announcement AmBev would purchase from the controlling shareholders of Quilmes 230.92 million class A shares for US$346.4 million.  Also the agreement stipulates that AmBev can purchase at the end of a seven-year period the remaining Quilmes shares owned by the current controlling group, the Bemberg family, with AmBev shares.  The Bemberg family had the option to sell to AmBev their remaining class A shares during a period beginning with the end of the first year and ending with the seventh year after the agreement was announced.  This option was exercised in April 2006.  This transaction was approved by the Argentine antitrust authorities on January 13, 2003, subject to the condition that AmBev and Quilmes divest themselves of certain brands and the AmBev plant in Luján, near Buenos Aires, to a company currently not present in the Argentine beer market.  On February 14, 2003, through our subsidiary CICSA, we filed a complaint before the Argentine federal courts in order to be eligible to participate in the acquisition of these assets. In February 2006, the Argentinean Supreme Court of Justice ruled against our complaint.  In December 2006, the Argentine authorities approved the sale of these assets to ICSA, a company owned by local investors.  On March 3, 2004, AmBev and Interbrew announced an agreement to merge the two companies, creating the world’s largest brewer under the name InBev.  This merger was closed in August 2004. On November 18, 2008 Anheuser Busch and Inbev merged creating the global beer leader. Consolidation in the beer industry has resulted in larger and more competitive participants, which could change the current market conditions under which we operate.

 

Due to the high cost of shipping beer to Argentina and the competitive advantage inherent to domestic producers as a result of Argentina’s returnable glass bottle system, we estimate that imported beer sales accounted for less than 1% of the total sales volume in 2009.

 

Our beer brands in Argentina also face competition from other alcoholic beverages such as wine and spirits, as well as from non-alcoholic beverages such as soft drinks.

 

Excise taxes for the beverage industry in Argentina have been subject to variations in the past.  The last modification was in 1999 and has been applicable since January 2000.  The following table shows current Argentine excise beverage taxes:

 

 

Future changes in excise taxes in Argentina could adversely affect our sales volume, market share and operating margins.

 

Our Non-Alcoholic Beverage Business

 

Overview.  We have produced and sold soft drinks in Chile since 1902.  Prior to November 1994, we independently produced, bottled and distributed carbonated and non-carbonated soft drinks in Chile.  Our line of soft drink products included our own proprietary brands, in addition to brands produced under license from Cadbury Schweppes plc. (currently Crush, Crush Light, Canada Dry Agua Tónica, Canada Dry Agua Tónica Light, Canada Dry Ginger Ale, Canada Dry Ginger Ale Light, Canada Dry Limón Soda and Canada Dry Limón Soda Light) and from PepsiCo ( currently Pepsi, Pepsi Light, 7Up, 7Up light and Mirinda).   Under a similar licensing arrangement with Watt’s, a local fruit related company, we bottled and distributed Watt’s nectar products in Chile from 1987 until December 2006. At present Promarca S.A., owned by us and Watt’s 50-50%, is the owner of the brand and we produce, bottle and distribute nectar products in bottles under Promarca’s license. We have been in the bottled water business since 1960, and since December 2007 this business is conducted by Aguas CCU-Nestlé Chile S.A., which since June 2009 is 50.1% owned by us and 49.9% owned directly or indirectly by Nestlé Chile S.A. Under our two proprietary brand names, Cachantun and Porvenir, we bottled and nationally distribute mineral water from our own two natural sources located within the central region of Chile. In September 2008 we added to our brand Glacier the brand Nestlé Pure Life, a purified water of the highest quality standards produced and distributed under the license of Nestlé Chile S.A.. We distribute the imported brand Perrier. We also produce, bottle and/or distribute sports drinks (Gatorade and imported Propel) and tea (Lipton) under the license of PepsiCo and our own brand energy drinks (Kem Extreme) as well as PepsiCo’s licenced one (imported SoBe Adrenaline Rush).    

 

In November 1994, we merged our soft drink and mineral water businesses with the one owned by BAESA in Chile (PepsiCo’s bottler at that time) creating ECUSA for the production, bottling, distribution and marketing of soft drink and mineral water products in Chile.  Therefore, we began producing PepsiCo brands under license (currently Pepsi, Pepsi Light, Seven Up, Seven Up Light, Mirinda, Gatorade and Lipton Ice Tea).  On November 29, 1999, we purchased 45% of ECUSA’s shares owned by BAESA for approximately Ch$54,118 million.  Since that date, we own 100% of ECUSA’s shares.  However, we have had control of ECUSA since January 1998 after the shareholders agreement was amended.  In January 2001, ECUSA and Schweppes Holdings Ltd. signed an agreement to continue bottling Crush and Canada Dry brands.  See “– Non-Alcoholic Beverage Production and Marketing in Chile”.

 

The Chilean Non-Alcoholic Beverage Market.  Commercial soft drink production was first established in Chile by us in 1902, and mineral water production began in 1960.  In 2009, we estimate that annual carbonated soft drinks consumption in Chile was 1,953 million liters or approximately 115 liters per capita.  We estimate that consumption of fruit nectars and juices was 291 million liters or approximately 17 liters per capita, in 2009.  We also estimate that consumption of mineral water, including both carbonated and non-carbonated, was 183 million liters or approximately 10.8 liters per capita, in 2009. Purified Water per capita consumption is estimated to be 7.6 liters with a total consumption of 129 millions of liters.

 

The soft drink market in Chile consists of both carbonated and non-carbonated beverages.  The principal types of carbonated beverages are colas and non-colas.  The principal non-carbonated beverages are fruit

 

 

 

Table of Contents

 

				Soft Drink and Water Sales
				Volume (1)						Liters Per Capita (2)
				(millions of liters)
		Carbonated				Mineral				Carbonated				Mineral
Year		Soft Drinks		Nectars (3)		Water		Total		Soft Drinks		Nectars (3)		Water		Total
2005		1,750		185		169		2,104		108		11		10		129
2006		1,866		223		169		2,257		114		14		10		137
2007		1,940		255		174		2,369		117		15		10		143
2008		1,989		286		186		2,461		119		17		11		147
2009		1,953		291		183		2,427		115		17		11		143
(1) Based on our sales data, publicly available information from competitors, equity research analyst reports, information from Nielsen and ANBER.
(2) Population estimated in accordance with the national census of April 2002.
(3) Includes liquid juices, nectars, fruit beverages and artificial juices.

Type		2007		2008		2009
Colas		58%		58%		58%
Non-colas		42%		42%		42%
Total		100%		100%		100%

30

The following table shows the soft drink and mineral water brands produced and/or sold by us through ECUSA during 2009:

 

 

In 1994, ECUSA and Cadbury Schweppes plc, or Cadbury Schweppes, the latter through its subsidiaries CS Beverages Ltd. and Canada Dry Corporation Ltd., entered into license agreements for all Cadbury Schweppes products.

 

On December 11, 1998, The Coca-Cola Company, or TCCC, announced an agreement with Cadbury Schweppes to acquire certain of the latter's international beverage brands, including those licensed to ECUSA, and in August 1999 the agreement was reported to have been consummated.  In September 2000, after more than a year’s litigation, both in Chile (suits at civil courts and antitrust authorities) and England (arbitration under ICC rules), ECUSA and TCCC reached an agreement superseding ECUSA’s previous license contracts with CS Beverages Ltd. and Canada Dry Corporation Ltd.  The new agreement, referred to as the “Bottler Contract”, was executed between ECUSA and Schweppes Holdings Ltd., concerning the Crush and Canada Dry brands, and was approved by the Chilean antitrust commission, thus putting an end to the proceeding regarding the Cadbury Schweppes brands issue and dismissing all complaints filed in consideration of the agreement. On January 15, 2009, the parties executed an amendment to the Bottler Contract which, among others, extended its duration until December 31, 2018 renewable for consecutive five-year periods provided that certain conditions are fulfilled.

 

In March 2006, ECUSA signed new exclusive bottling agreements with PepsiCo, Inc. and its subsidiary Seven-Up International, respectively, authorizing ECUSA to produce, sell and distribute Pepsi products in Chile.  The contracts terminate on March 31, 2020.

 

 

Likewise, in March 2006, a new exclusive bottling agreement was executed between ECUSA and Stokely Van-Camp, Inc., a subsidiary of PepsiCo, Inc., authorizing ECUSA to bottle, sell and distribute Gatorade products in Chile, for an initial term ending on March 31, 2010, automatically renewable for successive two or three-year periods if certain conditions set forth in the contract are met.  In August 2002, we began importing, selling and distributing Gatorade, the world’s number one isotonic drink.  Since October 2006, we have been producing Gatorade locally. In May 2008 we began importing, selling and distributing Propel, a low calorie sports drink targeted for women.

 

In November 2007, ECUSA signed an exclusive bottling agreement with Pepsi Lipton International Limited, authorizing ECUSA to produce, sell and distribute ready to drink tea beverages in Chile.  This agreement terminates on March 31, 2020.

 

In addition, ECUSA has been granted the exclusive license to produce and distribute our proprietary brands Bilz, Pap and Kem.  This license agreement had an initial ten-year term commencing November 1994, and is automatically renewable for six additional five-year periods.  The license agreement was renewed in 2004.

 

The license agreement for nectar products with Watt’s, which granted us exclusive production rights, was first signed in June 1987 and originally had a 33-year term.  In February 1999, a new license agreement was signed allowing us to produce new flavors and bottle Watt’s nectars in non-returnable packaging (wide mouth glass and plastic bottles).  A new license agreement between us and Watt’s was signed in July 2004.  This new contract provided us with a ten-year license renewable automatically for three consecutive periods of three years if the conditions set forth in the contract are fulfilled at the date of renewal.  In December 2006, we signed a joint venture agreement with Watt’s, under which we participate in equal parts in Promarca S.A., or Promarca.  This new company owns the brands “Watt’s”, “Ice Frut de Watt’s”, “Yogu Yogu” and “Shake a Shake” in Chile.  Promarca granted its subsidiaries, for an indefinite period, the exclusive licenses for the production and sale of the different product categories.  Therefore, we now participate in new product categories such as 100% fruit juices and fruit and dairy based beverages.

 

On June 14, 2001, ECUSA and Life O₂ Beverages LLP entered into an exclusive technology and trademark license agreement for the production, sale and distribution of water products with high concentrations of oxygen.  The agreement has an initial term of five years as from June 2001, renewable for one-year periods, unless otherwise stated by any party in writing.

 

In June 2003, we entered into the purified water business with our proprietary brand Glacier, increasing our water selection and reaching a larger amount of population with a more affordable product. The consumption of this product is currently concentrated in Antofagasta.

 

In October 2004, we relaunched Nobis, a traditional proprietary soft drink brand, to be used strategically against discount brands.

 

In February 2005, we launched a new Cachantun product, under the trademark Mas, a sugar free product made of mineral water, calcium and citric flavor, creating a new category of flavored water.

 

In December 2007, we entered into an agreement with Nestlé Chile S.A. and Nestlé Waters Chile S.A., the latter of which acquired a 20% interest in our subsidiary Aguas CCU-Nestlé Chile S.A., the company that owns the assets through which we develop our bottled water business in Chile.  As part of this new association, Aguas CCU-Nestlé Chile S.A. produces and sells the Nestlé Pure Life brand in Chile under a license contract of the same date, with an initial term of five years, renewable for successive periods of five years if certain conditions are met.  Nestlé had a call option to increase its ownership in Aguas CCU-Nestlé Chile S.A. by an additional 29.9%, which expired on June 5, 2009. On June 4, 2009 ECUSA received the notification from Nestlé Waters Chile S.A. exercising its irrevocable option to buy 29.9% of Aguas CCU-Nestlé Chile S.A. equity, within the scope of the association contract. Since the materialization of the sale, ECUSA holds 50.1% of the participation in Aguas CCU-Nestlé Chile S.A..CCU owns directly or indirectly 99.94% of ECUSA’s equity.

 

Under each license agreement, we have the exclusive right to produce, sell and distribute the respective licensed products in Chile.  Generally, under our license agreements, we are required to maintain certain

 

 

Table of Contents

 

		Soft Drinks and Nectars								Water
Container		2007		2008		2009		2007		2008		2009
Returnable (1)		38%		35%		36%		6%		6%		12%
Non-Returnable (2)		60%		63%		62%		94%		94%		88%
“Post-Mix” (3)		2%		2%		2%		-		-		-
Total		100%		100%		100%		100%		100%		100%
(1) Returnable soft drink containers include both glass and plastic bottles of assorted sizes. Returnable water containers include glass bottles of assorted sizes and returnable 19-liter jugs.
(2) Non-returnable soft drink containers include glass and plastic bottles, and aluminum cans of assorted sizes. Non-returnable water containers include plastic bottles of assorted sizes.
(3) Post-mix cylinders are sold specifically to on-premise locations for fountain machines.

		Percentage of Total Soft Drinks and
				Water Products Sold
Distribution Channels		2007		2008		2009
Off-premise retail		41%		44%		42%
On-premise retail		14%		15%		15%
Wholesalers		11%		10%		10%
Supermarkets		34%		31%		33%
Total		100%		100%		100%

33

 

The following table shows the sales volume of our soft drinks (carbonated and non-carbonated) by affiliation during each of the last three years (millions of liters):

 

 

The average price per liter to our customers for non-alcoholic products increased 3.7%, from an average of Ch$326.0 in 2008 to Ch$338.2 in 2009.  The four-year compounded annual growth rate increased 0.4%.  For water products, the average price per liter increased from an average of Ch$277.6 in 2008 to Ch$291.0 in 2009, for nectars the increase was from Ch$445.2 in 2008 to Ch$454.9 in 2009 and for soft drinks, it increased from Ch$391.2 in 2008 to Ch$329.7 in 2009.

 

Raw Materials and other supplies.  The principal raw materials used in the production of non-alcoholic beverages are water, sugar, flavoring concentrates and in the case of carbonated products, carbon dioxide gas.  We generally purchase our sugar requirements from Empresas Iansa S.A., the sole producer of sugar in Chile, and from imports.  We purchase flavoring concentrates for our licensed soft drink brands from the respective licensing companies.  See “– Our Soft Drinks and Mineral Water Production and Marketing in Chile”.  Flavoring concentrates for our proprietary brands are purchased from third party suppliers in Chile and Germany, which manufacture the concentrates under contract with us.  We obtain carbon dioxide gas from local suppliers in Chile.

 

We also require fruit pulp, juices, citric acid, other artificial and natural flavors, and chemical substances.  Although water does not represent a major raw material cost, it is nonetheless essential in the production of soft drinks.  We obtain all of our water from wells located at our plants and/or from public utilities.  The water is treated at facilities located at our plants to remove impurities and adjust the characteristics of the water before it is added in the production process.

 

We own two mineral water sources in Chile from which the Cachantun and Porvenir brand mineral water products are obtained.  These water sources are located in two areas near Santiago: Coinco and Casablanca, respectively.  All of our mineral water products are bottled at their respective sources and

 

 

Table of Contents

 

 

35

 

Competition in Chile. Our principal competitors in the soft drink business are companies, which produce, bottle and distribute soft drinks in Chile under licenses from The Coca-Cola Company and its affiliates.  The Coca-Cola Company’s products are produced, bottled and distributed in Chile through three separate licensees which market soft drinks under the Coca-Cola, Coca-Cola Light, Coca-Cola Zero, Fanta, Fanta Light, Sprite, Sprite Zero, Quatro Light, Nordic Mist, Taí, Andina nectars and juices, and Kapo juice brand names.  According to store audits conducted by Nielsen, Coca-Cola and related brands accounted for approximately 68% of total carbonated soft drink sales volume in 2009.  However, calculations made by us are higher than the Nielsen estimates. During 1998, a few supermarket chains began selling soft drinks products under private labels.  Additionally, discount brand producers entered the market and represented, along with private labels, approximately 8% of the soft drink market in 2009 according to Nielsen.  However, calculations made by us are higher than the Nielsen estimates.  Even though these brands are not a significant portion of the industry, they may increase their presence in the future.

 

After the formation of ECUSA, our market share decreased as a consequence of increasing marketing activity on the part of our competitors and the entrance of private labels and discount brand producers to the market. However, during 2009, our market share increased to approximately 24%.

 

Our market share for our carbonated soft drink products over the last five years is presented in the following table based on store audits conducted by Nielsen and our own estimates.  These Nielsen results are, for each year, higher than our own estimates.

 

 

Our domestic competitors in the soft drinks business have benefited from both internationally recognized brand labels (especially with regard to the Coca-Cola product line) and a large number of local bottling companies distributing their products throughout Chile.  As a result of the formation of ECUSA, we also similarly benefited from the internationally recognized Pepsi brand as well as our previous competitive strengths, which include a portfolio of nationally well known brands and a nationwide distribution system.  Additionally, during 2002, we launched Bilz Light, Pap Light, Agua Tónica Light and Gatorade, the world’s number one isotonic drink.  Gatorade is classified as a functional product, since in addition to refreshing, it hydrates the body and replenishes mineral salts lost during sports or other physical activities.  In April 2003, we introduced to the market Kem Xtreme, a soft drink with a high level of caffeine, which also is considered a functional product because it gives more energy.  In September 2004, we launched Canada Dry Ginger Ale Light, and in October 2004, we re-launched Nobis, a traditional proprietary soft drink brand, to be used strategically against discount brands.  In September 2006, we launched Canada Dry Limón Soda Light.  In January 2007, we introduced two new products into the market: (i) Slice by Kem, a tropical fruit flavored soft drink, and (ii) SoBe Adrenaline Rush, an energy drink sold under PepsiCo license.  In November 2007, we entered into a new product category, ice tea, with the brand Lipton Ice Tea, produced under the PepsiCo license. During 2008 we introduced Propel from PepsiCo, Watt’s Soya from Promarca (50% owned by us), and Nestlé Pure Life, a well-known purified water brand, in order to place ourselves in a leading position in the healthy foods market. In 2009, the Company introduced Mas Woman from Cachantun, a mineral water in a variety of flavors targeted for young healthy women. In addition, in the same year, the Company began to import the renowned mineral water Perrier.

 

Given the high percentage of soft drink sales volume in returnable containers coupled with the high cost of transportation to Chile, the market for imported soft drinks in Chile is not significant and accounted for less than 1% of total sales by volume in 2009.  While there are no legal barriers to entry, we believe that the existing returnable bottle system and high transportation costs may continue to deter potential competitors from exporting soft drinks to Chile.

 

Fruit nectars under the trade name “Watt’s”, a segment of our soft drink business, face competition from other liquid and powdered juices, which are provided by a variety of local companies.  After five years since the re-launch of Watt’s nectar, we have attained our sixth year as market leader in the bottled category of nectars, with a market share of 57% during 2009, according to Nielsen.

 

Our main competitor in the mineral water business is Vital S.A. (a subsidiary of Embotelladora Andina S.A., one of The Coca-Cola Company licensees in Chile).  We estimate that our sales of Cachantun and Porvenir brand mineral waters accounted for approximately 60%, while those of Vital S.A. products accounted for approximately 32% of total mineral water sales by volume in 2009.  Small domestic bottlers, private labels and discount brands, as well as imported mineral water products, comprise the remaining 8% sales volume.

 

The following chart shows estimates of our mineral water market share for the last five years based on store audits conducted by Nielsen and our own estimates.  These Nielsen results are, for each year, higher than our own estimates.

 

 

 

Our Wine Business

 

Overview. We entered the Chilean wine market in October 1994 with the purchase of 48.4% of VSPT’s equity for approximately Ch$17,470 million, thereby acquiring an interest in the third largest winery in Chile (formerly VSP).  During the first half of 1995, VSPT’s capital was increased by approximately Ch$14,599 million, of which we contributed approximately Ch$7,953 million.  During August-October 1997, VSPT’s capital was increased again by approximately Ch$11,872 million, of which we contributed approximately Ch$6,617 million, plus approximately Ch$191 million in additional shares bought during October 1997 in the local stock market.  Furthermore, in October 1998 and during 1999, we purchased additional shares in VSPT through the local stock exchanges for an amount of approximately Ch$5,526 million.  During March-June 1999, VSPT’s capital was increased by approximately Ch$17,464 million, of which we contributed approximately Ch$10,797 million.  Between November 2000 and March 2001, VSPT’s capital was increased by approximately Ch$22,279 million, of which we contributed approximately Ch$13,402 million.  During October and November 2005, VSPT’s capital was increased by approximately Ch$346 million.  We did not participate in this capital increase.  Between April and June 2007, VSPT’s capital was increased by approximately Ch$13,692 million, of which we contributed approximately Ch$5,311 million. On December 3, 2008, the extraordinary shareholders’ meetings of Viña San Pedro (VSP) and Viña Tarapacá (VT) approved the merger of both companies. The merged company was named “Viña San Pedro Tarapacá S.A. (VSPT)”, and started operating on December 9, 2008 but consolidating its financial statements with ours since October 1, 2008. In December 2008, VSPT’s capital was increased, as a consequence of the merge, by issuing 15,987,878,653 shares to be exchanged for the total number of shares issued by Viña Tarapacá at a ratio of 1,480.30828 new VSPT shares per each of the absorbed company.  As of December 2009, our total ownership interest in VSPT was 50.01%.   

 

We believe that expansion into the Chilean wine business provides us with the opportunity to further exploit our nationwide distribution system through the expansion of our beverage portfolio.  We also believe that further development of our domestic wine business may help reduce the seasonality of our sales, as wine sales in Chile tend to be stronger during the winter months when beer and soft drinks consumption decline.

 

The proceeds from VSPT’s capital increase during 1995 were used to reduce debt, expand capacity and add new hectares of vineyards in the Maipo Valley for producing premium red wines.  Part of VSPT’s capital increase during 1997 was used to add new hectares of vineyards in Requinoa, Chépica and Molina during 1997, and in Pencahue during 1998.  These purchases of land more than doubled the number of hectares of our vineyards.  The winery also increased its total vinification and wine storage capacity in both tanks and barrels from to 52.1 million liters as of December 31, 1998, to 62.1 million liters as of December 31, 2007, as well as its peak bottling and packaging capacity from 35,100 liters per hour in 1998 to 67,500 liters per hour as of December 31, 2007. As a result of the merger with Viña Tarapacá in December 2008, the vinification and storage capacity grew by approximately 50%, to 52 and 92 million liters respectively. Likewise, the bottling and packing capacity increased to 75,300 liters an hour in Chile.  The capital increase in 1999, was used to pay debts related to the winery’s expansion process.  The proceeds from VSPT’s capital increase during November 2000 and March 2001 were used to finance the winery’s acquisition of FLC, in Mendoza, Argentina, to plant the hectares of this new winery and improve its production facilities, as well as to refinance debt.  The proceeds from VSPT’s 2007 capital increase were used mainly to acquire shares in Viña Altaïr S.A. and Viña Tabalí S.A. due to respective increases in the capital of both of these entities, to acquire from Château Dassault the remaining interest in Viña Altaïr S.A. and for working capital.

 

In December 2001, Viña Santa Helena, or VSH, created its own commercial and productive winemaking operation, distinct from its parent, VSPT, under the Viña Santa Helena label in the Colchagua Valley.

 

In August 2003, VSPT formed Viña Tabalí S.A., a joint venture in equal parts with Sociedad Agrícola y Ganadera Río Negro Ltda. for the production of premium wines.  This winery is located in the Limarí valley, Chile’s northernmost winemaking region, which is noted for the production of outstanding wines.  In January 2007, Viña Tabalí S.A. acquired Viña Leyda, a boutique winery located in the Leyda Valley that produces well-regarded quality wines.  Consequently, Viña Tabalí S.A. changed its name to Viña Valles de Chile S.A.

 

In October 2004, VSPT acquired the well-known Manquehuito Pop Wine brand, a sparkling fruit-flavored wine with low alcohol content, broadening its range of products.

 

In September 2007, VSPT bought a 50% interest in Viña Altaïr S.A. which belonged to Château Dassault, in line with our strategy of focusing on premium wines. As a consequence VSPT owns indirectly 100% of said company.

 

At VSPT’s Extraordinary Shareholders meeting held on July 7, 2005, the shareholders voted to increase the number of board members from 7 to 9 and approved a capital increase that will be partially used for stock option programs.

 

In December 2008, Viña San Pedro (VSP) and Viña Tarapacá (VT) merged and created a new wine group, Viña San Pedro Tarapacá (VSPT). VSPT is formed by the wineries San Pedro, Tarapacá, Santa Helena, Misiones de Rengo, Altaïr, Viña Mar, Casa Rivas, Finca La Celia, Bodega Tamarí, Viña Leyda and Tabalí. These are all important and renowned cellars in Chile and Argentina, each with its own distinctive brands, and they represent the best wines these terroirs can deliver. Since the merger, VSPT became the second largest Chilean wine exporter and the third most important player in this market.

 

VSPT is an open stock corporation that, at December 31, 2009, had a market capitalization of Ch$147,888 million.  VSPT’s shares trade on the Santiago Stock Exchange, the Valparaíso Stock Exchange and the Chile Electronic Stock Exchange.

 

The Chilean Wine Market.  We estimate that wine consumption in Chile amounted to approximately 13 liters per capita in 2009.  Given that the Chilean wine industry is fragmented, no single wine producer accounts for the majority of production and/or sales.  The leading wineries include, other than VSPT, Viña Concha y Toro S.A., or Concha y Toro, Viña Santa Rita S.A., or Santa Rita and Bodegas y Viñedos Santa Carolina S.A., or Santa Carolina.  In addition, there are numerous medium-sized wineries, including Viña Undurraga S.A., or Undurraga, Cousiño Macul S.A., or Cousiño Macul, and Viña Cánepa y Cía., or Cánepa and Viña Montes. All wineries, which sell wine products that comply with industry and tax regulations, make up Chile’s formal wine market. VSPT is a member of the formal wine market, as are most other principal wineries in Chile. The SAG is the entity in charge of wine industry regulation and principally oversees inventory records and product quality.  We estimate that the formal market wineries produced and sold approximately 226 million liters of wine during 2009.

The following chart shows our estimates for the formal wine market and per capita consumption levels for wine in Chile for the last five years:

                              

Wines in Chile can be segmented by product type.  Chilean wineries produce and sell premium, varietals and popular-priced wines within the domestic market.  Premium wines and many of the varietal wines are produced from high quality grapes, aged and packaged in glass bottles.  Popular-priced wines are usually produced using non-varietal grapes and are not aged.  These products are generally sold in either cartons or jug packaging.

 

VSPT’s Production and Marketing.  VSPT (formerly VSP) was founded in 1865.  Its principal vineyards are located in Molina, approximately 200 kilometers south of Santiago.  The VSPT estate in Molina is one of the largest single-site vineyards in Chile with an area of 1,200 hectares.  As of December 31, 2009, VSPT’s vineyards covered an aggregate of 3,560 hectares in Chile, distributed among ten different plantations.  The