PepsiCo to Nestle Invest in Mexico as Growth Trumps Higher Taxes

PepsiCo Inc. (PEP) and Nestle SA (NESN) announced plans to invest $6 billion in Mexico as the lure of faster growth in Latin America’s second-largest economy trumps higher taxes on their products from soft drinks to pet food.

PepsiCo, the maker of Cheetos and Pepsi soda, said it will spend $5 billion in five years to expand its food and beverage business in Mexico, citing the nation’s growing middle class and opportunities for long-term growth. Nestle, producer of Friskies and Purina, said it will invest $1 billion over the same period to build plants including a pet food factory in the central state of Guanajuato.

The moves come just three weeks after Mexico applied a one peso per liter tax on sodas, an 8 percent tax on high-calorie foods and a 16 percent tax on pet food as part of a push to increase the government’s revenue base. The new investments show companies like PepsiCo aren’t being deterred by the impact of the duties, with most passing on higher taxes to consumers, said Marisol Huerta, an analyst with Grupo Financiero Banorte SAB in Mexico City, in a telephone interview.

PepsiCo “still sees a firm consumer and a growing demand for their products,” Huerta said. The higher taxes “could affect volumes, but not revenue because, they’re selling at a higher price. The consumer will feel it, but most will probably absorb it.”

Davos Forum

The announcements by PepsiCo and Nestle came at the World Economic Forum annual meeting in Davos, where Mexican President Enrique Pena Nieto and Economy Minister Ildefonso Guajardo were courting foreign investors. Mexico is forecast to grow the fastest among the biggest economies in North and South American this year at 3.4 percent, more than 2.8 percent for the U.S., 2.3 percent for Canada and 2.1 percent for Brazil, according to the median forecast of analysts surveyed by Bloomberg.

Cisco Systems Inc. (CSCO), the biggest maker of computer-networking equipment, also announced plans to invest $1.35 billion this year, which will generate more than 900 jobs, ProMexico, the nation’s investment promotion agency, said in a statement.

Nestle will fund a new infant nutrition factory in the western city of Ocotlan and a petfood factory in Silao, the Vevey, Switzerland-based company said in a statement today. Chief Executive Officer Paul Bulcke said the investment will create 700 direct and 3,500 indirect jobs and increase the amount of raw materials purchased locally.

Emerging Markets

PepsiCo said increasing spending in Mexico is part of its strategy to invest in emerging markets, which accounted for 35 percent of net revenue in 2012. The investment in Mexico will create about 4,000 new jobs and will be focused on innovation, infrastructure, agriculture and community, PepsiCo CEO Indra Nooyi said in Davos today.

“Mexico is an important market for PepsiCo and we believe there is tremendous opportunity for growth and expansion throughout the country,” PepsiCo Mexico President Pedro Padierna said in an e-mailed statement. “This investment reflects our confidence in Mexico’s future.”

Robin Tickle, a spokesman for Nestle, didn’t immediately return a phone call and e-mail after business hours.

To contact the reporters on this story: Eric Martin in Mexico City at emartin21@bloomberg.net; Brendan Case in Mexico City at bcase4@bloomberg.net

To contact the editor responsible for this story: Carlos Manuel Rodriguez at carlosmr@bloomberg.net

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