Coca-Cola Femsa Sees Thirst for Soda Overcoming 2014 Tax

Coca-Cola Femsa SAB, the world’s biggest franchised Coke bottler, is recovering from Mexico’s effort to curb the nation’s sugar addiction by taxing soft drinks.

Demand is proving so resilient that Rodrigo Echagaray, a Scotia Capital analyst, now sees the company’s 2014 volumes in Mexico falling only 4 percent, half his original estimate. Revenue growth may be the second-highest among the world’s 10 largest bottlers, according to data compiled by Bloomberg.

Those projections show Mexicans’ willingness to pay more after President Enrique Pena Nieto won approval of a levy on sugary beverages to help fight the highest obesity rates in North America or Europe. For Coca-Cola Femsa, that may mean less impact than once predicted in the country with the world’s highest per capita soft-drink consumption.

“Here in Mexico soft drinks are very rooted in the culture,” Veronica Uribe, a Monex Casa de Bolsa analyst, said by phone from Mexico City. “By raising prices 1 peso you may affect people’s income, but that doesn’t mean they’ll stop consuming.”

Tomorrow’s second-quarter earnings report for Mexico City-based Coca-Cola Femsa is forecast to show a 14 percent gain in sales to 41.4 billion pesos ($3.19 billion), according to the average of eight analysts’ estimates compiled by Bloomberg.

“The declines in volumes are lower than predicted,” Echagaray said in a phone interview from Toronto. “Coke is a strong brand” in Mexico.

Company’s Forecast

Coca-Cola Femsa forecast 2014 volumes in Mexico could fall as much as 7 percent after the soda tax took effect on Jan. 1. Arca Continental SAB, the second-largest Coca-Cola bottler in Latin America, said last week that second-quarter volumes slid only 4.3 percent. The Monterrey-based company once forecast an annual drop of 6 percent in Mexico, and the shares rallied to an 11-month high a day after the earnings release.

Fomento Economico Mexicano SAB, which is known as Femsa and has holdings including bottling operations and Latin America’s biggest convenience-store chain, will report quarterly results on July 25.

Coca-Cola Femsa’s stock performance has failed to match its two peers, falling 4.7 percent this year through yesterday. Monterrey-based Femsa gained 0.7 percent, while Arca rose 14 percent. Uribe recommends the shares as buy, while Echagaray rates the company as sector perform. Coca-Cola Femsa declined to discuss sales ahead of tomorrow’s earnings release.

Health Measure

Pena Nieto championed the soda tax last year along with an 8 percent levy on junk food as a public-health measure to fight diseases such as diabetes, Mexico’s top killer. At 33 percent, the obesity rate is the highest rate among major countries after Egypt, according to the United Nations Food and Agriculture Organization.

“That should be combated more through education,” not costlier sodas, said Uribe, who estimates Coca-Cola Femsa’s domestic volumes will only drop by half of her original prediction of as much as 7 percent. Mexico’s soda thirst and World Cup soccer obsession are helping sales, she said.

Half of Mexico’s consumers said they would spend more on beverages during the June 12-July 13 tournament, according to a survey published last month by Wal-Mart de Mexico SAB, Latin America’s biggest retailer.

Buttressing the government’s public-relations push on behalf of the tax were private anti-obesity efforts in support of the levy, including those funded by Bloomberg Philanthropies. The organization is controlled by Michael Bloomberg, the majority shareholder of Bloomberg LP, which owns Bloomberg News.

Soda Hangover

The new taxes may still weigh on bottlers for months -- or longer. Arca executives said on a July 17 conference call that a full recovery from the excise tax will take a couple of years.

Coca-Cola Femsa also may need two years to recover its pretax volume levels, in part because PepsiCo Inc. is increasing advertising in Mexico, said Fernando Olvera, a BBVA Bancomer SA analyst in Mexico City.

“The competition has been aggressive with its promotions,” Olvera said in a telephone interview. “It will be difficult for the company to recover quickly.”

Monex’s Uribe said the tougher challenge will be for the government to change public attitudes toward sugary sodas. For 2014, Coca-Cola Femsa sales will rise 12 percent, the second-most among consumer companies on Mexico’s IPC index, based on analysts’ estimates compiled by Bloomberg. Topping that group: Femsa, with a 13 percent revenue gain, the estimates show.

Soft drinks “are used as a substitute for calories in Mexico,” Uribe said. “It would take a whole generation before people reduce their consumption of such beverages.”

Guadalupe Mendoza, 50, is among the consumers unwilling to change her habits. Clad in a baggy sweater and sporting a buzz cut under a baseball cap, she said yesterday that she drinks a liter (0.26 gallon) of soda daily in search of the caloric boost she needs for her job lugging 30-liter propane gas tanks to the rooftops of Mexico City apartment buildings.

Instead of cutting down on soft drinks when the tax took effect, she stopped eating out more than once a week.

“There are many things I don’t buy anymore,” Mendoza said. “But I need my soda for energy.”

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