Mexican brewer and soft drinks group Femsa has become the latest firm to report a profit decline in 2008, with bottom line hit by currency rates, commodity prices and a weakening domestic economy. Michelle Russell looks at the group's Fortunes for 2009.

Femsa, saw fourth quarter profit plunge 76% yesterday (26 February), hurt by a foreign exchange loss related to the peso's decline.

Analysts had expected a fourth quarter net profit of MXN1.58bn (US$105.4m) but the licenced producer of Coca-Cola, Fanta and Sprite only managed a fourth quarter net income of MXN586m, or 16 centavos a share.

Higher raw material costs appear to have dented Femsa's beer profit, which continues to lag behind its soft drink and retail units. However, Oxxo, Mexico's largest convenience-store chain, has been a bright spot for the company as the number of stores rose to a record 6,374 and profit margins widened.

Femsa Cerveza, the company's beer unit, saw fourth quarter volume declines of 3.5% and 0.7% in Brazil and Mexico respectively.

Sales for the year rose by 15% to MXN44.8bn, however, the Mexican company said

Fourth quarter beer export volumes also increased by 12%, thanks to Dos Equis and Tecate brands in the US, as well as Sol in other key markets, however the rise was slower than a 19% rise in the same period of 2007.

The group blamed its earnings fall on devaluation of the Mexican peso against the US dollar, as well as greater exposure to rising commodity prices and write-down charges associated with restructuring its soft drinks business.

"In what seems to be now a routine, Oxxo came strong while beer underperforms," Alan Alanis, an analyst with JPMorgan Chase & Co told Bloomberg.

Earlier this month, Mexico's national statistics agency said consumer confidence fell to its lowest since 2001 as exports and remittances from Mexicans living abroad slumped.

Marisol Huerta, an analyst with Actinver SA in Mexico City, believes that a weakening economy may force Mexican shoppers to look to buy cheaper, supermarket soft-drink brands rather than Coca-Cola brands.

"Shoppers are watching their pennies," Huerta said. "Competition could hit the company's sales."

Group CFO Javier Astaburuaga remained optimistic, however, when on a conference call to analysts yesterday.

"The Mexican economy will likely contract in 2009," he told analysts. "The company will respond with lower spending and cost cuts. We're assuming a moderate contraction in demand across our products and markets."

Astaburuaga said the company will reduce its capital spending by 30% to $900m this year, as well as reduce its workforce and spending on marketing, but declined to provide further details.

CEO José Antonio Fernández added: "We are taking broad measures to rationalise costs, expenses and investments at every level of the organisation, so that we are in a good position to weather the storm and come out in even better shape than we are today.".

Zacks equity research analysts were also confident of a good outcome. "We believe that going forward, new lines of business combined with the recent acquisitions will enhance its topline growth despite the difficult economic environment throughout the world, including Mexico," Zacks said.

Femsa, which is 53.7%-owned by Fomento Económico Mexicano, acquired Mexico-based juice company Jugos del Valle in November last year. Months earlier the group bought the Refrigerantes Minas Gerais (Remil) franchise in Brazil, from The Coca-Cola Co.

Remil, in particular, contributed strongly to Femsa's 6% volume rise for the full-year, the group said.

Femsa shares in Mexico rose 1.68% to 35.70 pesos on Thursday and its New York-traded stock gained 2.1% to reach $23.84, prompting JP Morgan analyst Ben Laidler to predict that Mexican earnings will weather the crisis.

"The government will boost spending to revive growth and US demand may recover in the second half of 2009," he told Bloomberg.