Gruma, S.A. de C.V.

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Gruma, S.A. de C.V.

Calzada del Valle 407 Oriente
66220 San Pedro, Garza Garcia, Nuevo León
Mexico
Telephone: (528) 399-3300
Toll Free: (800) 424-7862
Fax: (528) 335-9935
Web site:http://www.gruma.com

Public Company
Incorporated: 1971
Employees: 12,384
Sales: 13.77 billion pesos ($1.39 billion) (1998)
Stock Exchanges: Mexico City New York
Ticker Symbol: GMK
NAIC: 115114 Postharvest Crop Activities; 311211 Flour Milling; 311812 Commercial Bakeries; 31183 Tortilla Manufacturing; 311919 Other Snack Food Manufacturing; 333294 Food Product Machinery Manufacturing; 551112 Offices of Other Holding Companies

Gruma, S.A. de C.V. is perhaps best known as the holding company for a Mexican food conglomerate, Grupo Industrial Maseca S.A. de C.V. (Gimsa), and its proprietary brand of Maseca corn tortillas. Through 71 percent-owned Gimsa, Gruma is the world’s leading producer of corn flour and corn tortillas. Gruma Corp., the parent firm’s wholly owned U.S. subsidiary, makes the same products plus snack foods and bakery products. A smaller Central American subsidiary also makes and sells the same products, and another Mexican subsidiary produces and markets both tortillas and bread. Gruma is 22-percent owned by the U.S. conglomerate Archer-Midland-Daniels Co. (ADM), and a joint venture with ADM performs milling of wheat flour in both the United States and Mexico. Gruma’s founder, Roberto González Barrera, and other family members own about two-thirds of Gruma’s stock.

A Dry Process for Making Tortillas: 1949–89

The humble tortilla—essentially a corn pancake that also doubles as a sandwich-like wrapper for a variety of fillings—is a staple of the Mexican diet. For at least 1,000 years the making of tortillas involved husking ears of corn, boiling the kernels in water to which lime has been added, and then forming a patty of the wet dough and placing it in a flat earthenware pan for frying. Unfortunately, the traditional tortilla becomes stale a mere four or five hours after frying.

In 1949 Roberto M. González and his son, Roberto González Barrera, established a plant producing 15 tons of corn flour a month in Cerralvo, a community in the state of Nuevo León. Only 18 at the time, González Barrera had dropped out of school at 11 and was a traveling salesman for Mexico’s largest industrial enterprise, Petróleos Mexicanos (Pemex) before going into business for himself. After years in the corn flour business, during which they researched and tested new technologies, González Barrera and his associate Manuel Jesús Rubio took out a patent, in 1965, on an improved tortilla apparatus and production method. At the beginning of 1971 González’s enterprise consisted of seven plants. Although widely known as Maseca (“dry dough”) for the brand name of its product, the company’s name was Gruma (an acronym for Grupo Maseca).

The Maseca process of preparing the raw material for a tortilla consisted of boiling corn for 30 minutes, drying the kernels instantly by injections of hot air, and milling them into flour prior to humidifying the product into a mass suitable for making tortillas. This had certain advantages over the traditional wet dough prepared by thousands of small shops as well as millions of homemakers. Not only was the Maseca product more sanitary and uniform in quality, it had a longer shelf line. Moreover, Gruma’s machines were better than the ones already in existence, which made only 30 to 40 tortillas per minute. Gruma’s machines were not only faster, they used less water and fuel per tortilla and made 20 percent more tortillas per kilogram of corn.

Gruma collaborated with research groups in the design of plant and equipment processes and products. Elektra Good Machinery Co. began making the machines in 1976 and also was responsible for roasting, frying, packing, mixing, and cutting. Enrichment of Maseca corn flour with vitamins and proteins began in the 1970s at the San José, Costa Rica, tortilla plant Gruma had established in 1971. The largest such facility in the world, the plant also converted soy meal to protein.

According to the Mexican weekly Proceso, Gonzñlez Barrera enjoyed political support from General Bonifacio Salinas Leal, a governor of Nuevo León, and Raúl Salinas Lozano, minister of trade and industry from 1958 to 1964, who extended loans and special permits during this period. However, González later told Jorge Monjaras of the Mexican business magazine Expansión that he was handicapped by heavy government regulation of the tortilla industry. “One couldn’t just open a mill,” he complained, adding “One had to obtain permission, and production was limited by a quota. Similarly, one couldn’t just open a tortilla shop anywhere. A certain number of inhabitants were required for each store.” Selling the product directly to homes was forbidden. Existing artisinal tortilla producers stifled potential competition through these means, with the help of allies in the nation’s ruling Institutional Revolutionary party.

In spite of these restraints, Gruma was 46th in size among reporting Mexican companies in 1979, with sales of 4.16 billion pesos ($183.9 million), compared to 1.65 billion pesos ($72.2 million) in 1977. By this time its annual production was 750,000 tons of flour. Gruma also opened its first U.S. plant in 1976 and began marketing tortillas, tortilla chips, and taco shells on the West Coast under the Mission Foods name. Automatic International Corp. was Gruma’s research and development company in the United States, while Asesoría de Empresas S.A. was the Mexican subsidiary established in 1979 to provide the others with technical, financial, commercial, and administrative assistance. There were 16 affiliated companies in 1978 and a total of 8,500 employees. The 12 plants in Mexico included one that produced air conditioners.

Giant Strides Forward: 1990–95

The main Mexican subsidiary, Grupo Industrial Maseca, S.A.(Gimsa) tripled in sales in real terms between 1987 and 1989 and became a public subsidiary in 1990, selling 15 percent of its shares and using the proceeds to add three more plants. Another seven percent of the company was quickly sold in two secondary offerings. The three new plants raised Gimsa’s production from 1.2 million to 1.65 million tons of flour. By the end of the year Gimsa held 61 percent of the Mexican market for industrialized corn flour. However, 73 percent of the nation’s tortillas still were being made by the traditional wet-dough method.

Gruma was at this time a privately owned conglomerate of 80 companies engaged in a host of activities, including the fabrication of machinery for the food sector, the development of technology for the corn industry, and the Mexican operation of fast-food restaurants chains such as Burger Boy and Pizza Hut. It had also opened a tortilla plant in Honduras in 1987.

Gruma became a public company in 1992, and its shares began trading on the Mexican stock exchange in 1994. González Barrera became director in 1992 of the Banco Mercantil del Norte (Banorte), which was privatized after a decade in government hands. Gruma acquired ten percent of the bank’s shares. The company discontinued its operations in the fast-food restaurant business in 1994.

Of Gruma’s 1990 sales of about $800 million, $220 million were in the United States. In 1991 Gruma Corp., the U.S. subsidiary, was operating 12 plants in five states. By 1994 Gruma Corp. accounted for almost 40 percent of the parent company’s revenue. Sales consisted of corn flour, tortillas, snack foods, and bakery products sold under the brand names Mission and Guerrero. Mission, a more upscale brand, made packaged tortillas and served institutional customers such as Taco Bell, which was buying one-third of its taco shells. (Guerrero Foods, a Los Angeles-based company, had been purchased by Gruma in 1988.)

Still, González Barrera was not satisfied with the results his firm had achieved in the United States. “In that country there’s lots of discrimination,” he told an Expansión reporter in 1994. “We struggle to win the confidence of supermarkets, to prove that we’re as good as other suppliers,” he added.

In Mexico, Gruma benefitted greatly from support by Carlos Salinas de Gortari, who was president from 1988 to 1994. In 1990 the Mexican government committed itself to promoting the substitution of corn flour for dough in the production of tortillas. Conasupo, the government agency that distributed basic foods, resolved that the following year, in any part of Mexico where new corn-flour plants were built, it would phase out its program of supplying millers of corn for traditionally made tortillas with cheap corn. If the millers paid the higher market price, the ministry of commerce said it wouldn’t let them pass on the higher price to consumers. Furthermore, according to a 1996 New York Times article, millers who still refused to convert corn to flour received strictly limited amounts of Conasupo’s worst corn. Seven thousand Mexican tortilla-making shops closed between 1993 and 1995.

At the same time, government subsidies to Gruma grew. According to Proceso, between 1989 and 1992 producers of corn received subsidies of more than $7 billion. Because Gimsa and other millers were the ones who had to pay the growers the government-guaranteed price of corn—higher than the international market price—and were required to sell to tortilla producers at a fixed price, they went to the government for the difference as a rebate, which in 1992 represented about 35 percent of Gimsa’s 1.93 billion pesos ($492.6 million) in revenue. This subsidy grew to 43 percent of Gimsa’s revenue in 1994. Practically the only flour-making alternative to Gimsa was Miconsa, a poorly run public enterprise that was later privatized. By this time Gonzalez was a billionaire; his net worth was estimated at $1.7 billion in 1997.

Company Perspectives:

Gruma is committed to achieving dynamic, long-term profitable growth by leading the field in the production, marketing and distribution of high-quality basic food products and flours made from corn and wheat, maintaining its principal focus on corn flour and tortillas. Our operations will be supported by efficient manufacturing and marketing systems, including mass distribution, where profitable.

To Proceso and other critics of the Mexican government and ruling party, the tortilla policy was a prime examples of amiguismo —the Mexican version of crony capitalism. González Barrera had come to the aid of Raúl Salinas Lozano—father of the president—when he fell into disgrace in the 1970s. Moreover, he was related by marriage to Carlos Hank González, secretary of agriculture in the Salinas administration. In 1996, after the end of Salinas’ term in office, the Mexican government imposed quotas on sales of subsidized corn in order to combat fraud and waste. Corn subsidies and tortilla price controls were phased out during 1998 and eliminated at the end of the year.

Alliance with Archer-Daniels-Midland: 1996–98

U.S.-based Archer-Daniels-Midland Co.(ADM) purchased a 22 percent stake in Gruma for $258 million in 1996. The transaction also established two joint ventures. One, 80-percent owned by Gruma—already the largest corn-flour producer in the United States—combined the U.S. corn-flour operations of both companies, representing about 25 percent of the U.S. market. Gruma Corp. was already running the biggest tortilla factory in the world in the Los Angeles area, with the capability of making 800,000 tortillas an hour.

The other joint venture, 60 percent controlled by Gruma, involved two new wheat-flour mills that ADM had opened in Mexico. The alliance with ADM gave Gruma the technology and financial backing to break into Mexico’s $1.5-billion-a-year wheat-flour and bread market, dominated by Grupo Bimbo, S.A. de C.V., which held about 95 percent of the nation’s packaged-bread market. By the fall of 1997, Molinera de México, S.A. de C.V., the name of this joint venture, had acquired three more mills and two wheat-flour brands and was scheduled to provide the flour for a bread plant to open in Monterrey.

Gruma Corp. had sales of 6.62 billion pesos (about $670 million) in 1998, with 12 tortilla plants and five corn-flour plants in the United States. The company held 83 percent of the U.S. corn-flour market under the Maseca label and 24 percent of the tortilla market under the Mission and Guerrero labels. At the beginning of 1999 it acquired four more tortilla-producing plants.

Gimsa had 18 corn-flour plants in Mexico in 1998. The parent company’s sales from this 71 percent owned subsidiary came to 5.07 billion pesos (about $512.7 million). The cornflour industry had a 47 percent market share in the production of tortillas in Mexico (excluding self-production), of which Gimsa’s share came to 69 percent. Gimsa also opened a tortilla factory in Birmingham, England, in 1997, expecting $30 million in sales that year from all over Europe.

Gruma Centro America had five corn-flour plants and five other plants in 1998, including a bread factory and two bakeries opened in San José, Costa Rica, in 1995. Products included packaged bread and tortillas, tortilla chips, and pastries as well as corn flour. Sales in 1998 came to slightly more than 1 billion pesos (about $101 million). In 1999 Gruma purchased the Venezuelan operations of International Multifoods Corp., including facilities producing wheat and corn flour, for $74.5 million.

Molinas de México, the parent company’s 60 percent owned joint venture, had seven wheat-flour mills, nine percent of the Mexican wheat-flour market, and 1998 sales of 791 million pesos (about $80 million). Productos y Distribuidora Azteca, manufacturer and marketer of packaged corn and wheat tortillas under the Misión label—introduced in 1994—and bread under the Breddy brand, had three tortilla plants and one bread plant. (Gruma claimed in 1999 to have captured a 12 percent share of the bread market in northern Mexico with the Breddy brand.) The Gruma empire also included tortilla machines and related equipment sold to supermarkets.

Principal Subsidiaries

Gruma Centro America, S.A.; Gruma Corporation (United States); Grupo Financiero Banorte, S.A. de C.V. (10 percent); Grupo Industrial Maseca, S.A. de C.V. (70.6 percent); Molinera de México, S.A. de C.V. (60%); Productos y Distribuidora Azteca, S.A. de C.V.