Mexico a growing jewel in soft drink crown
On the doorstep of the US, the world's largest soft drink market, Mexico is, nonetheless, a completely different animal and turning in growth figures for CSDs US businesses can only dream of. Ben Cooper examines the market and signs of future prospects.
The Mexican carbonated soft drinks (CSD) market is not only the second largest in the world after the US, but it is also showing growth while many major mature CSD markets have plateaued. Moreover, it is also a highly profitable CSD market.
According to data collated by the equity analyst Legg Mason from industry sources and analysts, carbonated soft drinks consumption in Mexico rose from 10.809 billion litres in 1995 to an estimated 16.283 billion litres in 2003. Over the last five years, the compound annual growth rate for the sector in volume terms has been 4%, compared with 1.2% in the US for the same period. Per capita consumption has increased from 115.0 litres in 1995 to an estimated 156.2 litres in 2003.
The growth trend appears to be continuing in 2004, judging from recent results from Coca-Cola Femsa, the largest Coke bottler in the country and the second largest Coke bottler in the world. Coca-Cola Femsa reported that CSD volumes increased by 3.7% in the first quarter of 2004 against the same period in 2003. The company said CSD volume increases were mainly driven by a 4.3% growth in the cola category.
PepsiCo also included Mexico among volume growth markets in its first-quarter results, and at the beginning of April announced that PepsiCo de Mexico was to invest some US$30m in new product development. Meanwhile, the Coke bottler, Embotelladoras Arca, announced in February that it is to invest around US$60m this year in the expansion and modernisation of its operations in Mexico.
According to Legg Mason, the principal reason for the generally higher profitability seen in the Mexican CSD market is the relatively fragmented retail distribution system. "Small retailers, mostly in densely-populated regions, dominate Mexico's channel mix," writes Mark Swartzberg its beverage analyst in a recent report on the Mexican CSD market. "This is a major cause for the relatively high level of profitability that characterises Mexico's CSD market. As well, bottler routes and infrastructure are substantially different from those required in the US."
According to figures from Coca-Cola Femsa, small retailers account for 72% of total CSD sales, while supermarkets and hypermarkets only account for 7%. Restaurants and bars represent 10% of sales. Meanwhile, PBG puts the small retailers' share at 65%, with supermarkets and hypermarkets accounting for 10%.
An illustration of the higher profitability can be seen in a comparison between the profit-per-case achieved by Coca-Cola Femsa in Mexico and that registered by the largest Coke bottler in the US, Coca-Cola Enterprises (CCE). Effectively, Femsa makes 80% more operating income per unit than CCE, achieving US$0.61 operating profit per case against CCE's US$0.34 per case in the US.
Coca-Cola is the hugely dominant market leader in Mexico with a 71.9% market share, essentially divided between its three principal bottlers, Femsa (37.7%), Arca (16.3%) and Contal (13.6%). Pepsi is a long way back with 15.1%. Its two main bottlers are Pepsi Bottling Group with 9.8% and Geusa with 3.8%. The Peruvian-owned Kola Real has a 4% market share, having grown strongly from a very small base in recent years, while Cadbury Schweppes has 2%. Such is Coca-Cola's dominance that other brands tend to sell at a discount to Coke brands.
The scale and high profitability of the Mexican market is reflected in the substantial proportion of operating income which the major soft drinks groups derive from the country. Coca-Cola makes around 10% of its operating income from Mexico while 3% of PepsiCo's operating income comes from its soft drinks operations in Mexico. Mexico also accounts for 9% of operating income at PBG.
Exposure to the Mexican market may be no bad thing. According to Swartzberg, an upturn in the Mexican economy is likely to boost soft drinks volumes and bolster prices too. However, he warns that prices generally have been under more pressure in recent years than had previously been seen.
"Mexico's economy appears to be turning a corner, potentially favourable to the soft drink sector's growth and pricing power," says Swartzberg. "But major carbonated soft drinks brands continue to compete at generally lower prices than they did a few years ago, a by-product of lessened economic vitality and increased appeal of B Brands - with only mixed signs that selling prices have stabilised in the country's two largest soft drinks markets, Mexico City and Monterrey."
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