The Coca-Cola Company is facing a potentially damaging spat with one of its largest bottlers. Earlier this week, Mexico's Coca-Cola Femsa said that the Coca-Cola Company had informed it that in a three-year period, it will gradually increase concentrate prices for carbonated soft drinks in Mexico and Brazil.

In retaliation Femsa has said in order to offset the impact of these changes on profitability it will reduce its contribution to marketing expenditures on Coke's soft drink brands in Mexico and Brazil, effective the same dates as the cost increases.

In its third quarter results statement, Femsa said that in Mexico, Coke's increase in concentrate prices will raise the cost for all carbonated soft drinks in non-returnable presentations.

"Based on our internal estimates for revenues and sales volume mix the incremental cost in Mexico represents approximately US$20m in 2007, increasing gradually by a similar amount during the following two years, reaching around US$60m by the end of 2009."

Femsa added that in Brazil, the increase will affect all carbonated soft-drink presentations, and, based on such estimates, will raise its costs by approximately US$1m in 2006, increasing gradually by a similar amount the following two years, reaching around US$3.8m by the end of 2008.

The analyst at Bear Stearns has already lowered its rating on Coca-Cola Co to "peer perform" from "outperform," on the back of concerns over its relationship with its bottlers.

In a research note reported in just-drinks earlier this week, the broker's analyst Carlos Laboy said: "It remains to be seen if Coke stays on a path that has previously resulted in bottling conflict, mistrust, and low single digit operating earnings growth, or if it will fully accept the need to build a genuine partnership with its bottlers."

Laboy said the soft drink giant must do away with "the notion that Atlanta has the highest claim on any bottler's cash flow, at any time, and its regressive concentrate pricing system which promises to tax highest those bottlers that perform best.

"Successful partnerships require clarity of economic returns and splits," he concluded.