1 Market Integration Sigma Alimentos May 7,2004

2 Agenda l Precedents ━ Imports ━ Exports l Sigma Alimentos ━ Processed Meat ━ Yogurt ━ Cheese ━ Frozen Food l Opportunities

3 Agenda l Precedents ━ Imports ━ Exports l Sigma Alimentos ━ Processed Meat ━ Yogurt ━ Cheese ━ Frozen Foods l Opportunities

4 Precedents l During the eighties (1986) Mexico enters the global markets (GATT) l Mexico decides to enter in a Tri Lateral agreement USA-Canada-Mexico ━ NAFTA (1994) l Mexico expands in a case by case its agreements with ROW: ━ Colombia and Venezuela (1995) ━ Costa Rica (1995) ━ Bolivia (1995) ━ Nicaragua (1998) ━ Chile (1999) ━ European Union (2000) ━ Israel (2000) ━ Salvador, Guatemala and Honduras (2001) ━ Iceland, Norway, Liechtenstein and Switzerland (2001) ━ Uruguay (2001)

5 Precedents l In 2003 the weighted average import tariff from trade partners countries was 1.8%, and 16.1% for non trade partners FTANon FTATotal Average Weighted Average

6 Precedents l Mexican exports have grown significantly from B$ 18.0 USD (1980) to B$ USD (2003), 10.1 % CAGR Mexican Exports (B$ USD)

7 Precedents l Also, Mexican imports have grown from B$ 21.1 USD (1980) to B$ USD (2003), 9.5 % CAGR ━ Most of the trade with NAFTA partner countries Mexican Imports (B$ USD)

8 Agenda l Precedents ━ Imports ━ Exports l Sigma Alimentos ━ Processed Meat ━ Yogurt ━ Cheese ━ Frozen Foods l Opportunities

9 Sigma Alimentos l Producer and distributor of processed meats, yogurt, cheese and frozen prepared foods l Sales of B$1.1 USD l 15,000 people employeed l Owner of the largest refrigerated distribution network in Mexico l Leader in brands

10 Brands

11 Processed Meats l Leader in processed meats, 47% MS in a market worth B$ 1.5 USD ━ Almost three times larger than next competitor ━ Leader in both mom & pop and supermarket channels ━ Customer orientation ━ Marketing orientation ━ Multiple brands strategy

12 Processed Meats l Main Raw Materials ━ Pork Meat ━ Turkey Thigh ━ Mechanically Separated Chicken and Turkey l The use of poultry meat started thirty years ago in the World’s Processed Meat Industry, in Mexico at the beginning of the nineties following ━ Global market and availability of raw materials ━ Development of new market segments ━ Consumer seeking variety, health and lower prices l Distribution agreement with Oscar Mayer in 1993 l Started exports to USA Hispanics market in 2002

13 Yogurt l Introduced in 1994 as a franchise from French company Sodima International ━ Technology ━ Marketing l Yoplait is the second brand in Mexico, 23% Market Share, in a dinamic market worth approximately M$ 700 USD ━ Brand positioning ━ Product innovation ━ Leverage Sigma’s distribution network

14 Cheese l Large and very fragmented market l Entered this market 1995 l Sigma’s growth in the last five years, 15% per year ━ Sales support ━ Brand image and advertising ━ Distribution network l Exports to Hispanic markets: Authentic Mexican fresh cheeses

15 Frozen Foods l Anticipating the market and consumer tendencies in Mexico and taking advantage of development of ethnic foods in the US, Sigma entered into this market with a line of a mexican frozen food products in ━ Developed a Frozen Food Distribution Network ━ Plant strategically located for exports, close from the border ━ Leverage with Sigma’s distribution infrastructure l JV with ConAgra Foods in 2001 ━ Sinergies between partners

16 Quality l High and Consistent Quality for the consumer

17 Plants and distribution centers l 70 Distribution Centers l 15 Plants ━ 11 Processed Meats ━ 1 Yoghurt ━ 2 Cheese ━ 1 Frozen Foods Distribution Center Plant

18 Exports to United States l Initial export efforts for processed meats and cheeses to California, Texas and Chicago in 2002 l Marketing differentiation strategy ━ Taking advantage of brand recognition (FUD) ━ Processed meats and cheeses for Hispanics wanting familiar brands and products ━ Know how in sales and marketing to Hispanics

19 Agenda l Precedents ━ Imports ━ Exports l Sigma Alimentos ━ Processed Meat ━ Yogurt ━ Cheese ━ Frozen Foods l Opportunities

20 Opportunities l Need Governments decision, commitment and willingness to move forward in a market integration ━ Must have clear vision for the future relationship l However, keep working on Free Trade within NAFTA ━ Still a lot of pending issues ━ Good moment to stop and analize next steps

21 Opportunities l Subsidies and governmental support for the Agrifood Sector among countries are different and distort the trade ━ This is an inequality subject and without near solution l Lack of infrastructure and its costs affect competitiveness: ━ communications ━ highways ━ electricity

22 Opportunities l A link of the productive chain is substituted by an exterior one when it loses competitiveness ━ This substitution directly affects the previous links inside the chain l Example: ━ Mexican Mature Cheeses have been displaced by producers from New Zealand, Australia and others Exterior Productive Chain National Productive Chain without Protection FarmAgro-Industries Food Industry SalesConsumer Farm Food industry ConsumerSalesAgro-Industries l Supplier development a key issue: pork, turkey, chicken, milk

23 Opportunities l Other issues that affect trade despite having low or null tariffs: ━ Sanitary ━ Border Inspections and Regulations ━ Border Security ━ Transportation

24 Opportunities l Sanitary ━ Different certificate requirements and plant inspections l TIF (Mexico), USDA (United States) ━ Tri national sanitary committee l Stronger rol vs OIE l BSE l Avian influenza ━ Still restrictions in transit among NAFTA l Do not recognize disease-free zones l Limit market alternatives l Restrictions inside Mexico

25 Opportunities l Sanitary ━ Examples: l Chicken “Taquitos” export from Mexico to USA l To export processed meats to USA you need your suppliers to be a USDA and do not accept TIF as a certificate l Constrains to export processed pork meat to USA, has to bring pork from Yucatan, Sonora or the USA, process in Mexico City or Monterrey and export to USA Import US Chicken Cook and Process the “Taquito” (Mexico) Export “Taquito” to USA

26 Opportunities l Border Inspections and Regulations ━ Physically inspections by SAGARPA and USDA, lots of precise paperwork ━ Randomize inspections and analisis l Could be two or three weeks delay, even though TIF or USDA had already certified - Critical in perishable products l Sometimes all shipments are inspected

27 Opportunities l Bioterrorism ━ Registration ━ Sistems to operate l Transportation ━ Requirement to change trucks and trailers at the border ━ Cost and delays ━ Free-Transit? l Big vs Small

28 Opportunities l Finally, concrete actions will benefit the final consumer with better prices, variety and quality under equal opportunities for participants in the supply chain. CONSUMER

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