Although Mexico doesn’t feature in the top fifty nations ranked by GDP per capita, the country has the world’s largest appetite for carbonated soft drinks (CSD). In addition to sugary drinks, Mexico also has the world’s highest per capita bottled water consumption of around 260 liters (69 gallons), thus providing a solid sales ground for beverage manufacturers.  Dr Pepper Snapple (NYSE:DPS) is one such beverage maker, which generated 8% of its net sales in 2013 from Latin America alone, with more than 90% coming from Mexico.  As Dr. Pepper faces a soda slump in the U.S., and has no immediate plans of international expansion, the company has looked to derive top line growth from Mexico. Dr. Pepper’s sales in the country rose 11% last year, while the overall sales remained flat.
However, Mexico seems to have begun its health battle against widespread obesity and diabetes. Not only is Mexico the world’s largest consumer of sugary drinks, it also has the highest obesity rate of 32.8% and a high diabetes rate of 9%. The country recently introduced a soda tax and has vowed to improve domestic water facilities in the coming years. As Dr. Pepper’s core business in Mexico includes carbonated drinks and bottled water, the country’s efforts to improve health conditions could stall growth for the company. We have a price estimate of $49 for Dr Pepper Snapple, which is around 5% lower than the current market price.
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- Dr Pepper Snapple Is Heavily Dependent On CSDs, But That’s Not A Problem
- Dr Pepper Is Defying An Otherwise Tough US Carbonated Market
Dr. Pepper’s Water Brands Face Threat Of Losing Volumes
Volumes in Mexico increased 3% in 2013 year-on-year for Dr. Pepper, fueled by a double-digit percent rise in volumes of the carbonated water brand Penafiel. The still mineral water brand Aguafiel also grew by 6% in volumes in the country last year. Mexico’s bottled water industry is expected to generate $13 billion annually by 2015, surpassing the U.S. as the world’s largest bottled water market.  This market provides potential growth opportunities for beverage companies due to widespread concerns over the safety of tap water and the inconvenience and expense of boiling large quantities of water in the country. However, below we discuss some factors that could hamper growth of Mexico’s bottled water market and also pour over Dr. Pepper’s water ambitions in the country:
- Imposed Laws To Facilitate Tap Water
According to a law introduced by Mexico city this year, restaurants will have to install filters in order to serve potable water to consumers, relegating usage of bottled water. Around 65,000 restaurants will have to install filters by mid-year in order to evade fines on non-compliance. As the country looks to fight water borne diseases and work on its safe drinking water problem, this move will decrease bottled water consumption in restaurants and could potentially hurt sales of big corporate companies which sell bottled water.
- Flavored Penafiel Falls Under Soda Tax
Sparkling water is considered a safer and healthier alternative to sugary drinks as consumers look to refrain from sugar intake but prefer the carbonation. This is why sales of carbonated water stand to further increase, as the recently imposed soda tax in Mexico could impede demand for CSDs. The government imposed a one-peso-per-liter tax on sodas in January, which will raise prices of CSDs as beverage makers and bottlers will look to pass this tax on to consumers.  However, the carbonated mineral water brand Penafiel uses high fructose corn syrup (HFCS), which is also used in regular CSDs, in its flavored versions. As HFCS is an added sugar, flavored Penafiel also falls under the category of sugary sodas and will be taxed. A hike in prices of the popular flavored Penafiel could slow sales of this mineral water brand in the country.
- Soda Tax Proceeds Might Go To Water Amenities
While legislation to provide at least 3.5 billion pesos (around $270 million) to install water fountains in schools is still pending in the Mexican Congress, proceeds from the nationwide soda tax might be utilized for this purpose.  As the government is expected to collect close to $1 billion from this tax, the money could be utilized to support health efforts in the country, which include induction of clean-water facilities and repairment of old and rusty underground pipes that contaminate water. With the improvement of tap water, sales of bottled water could decline in Mexico.
- Stiff Competition In Bottled Water
Danone and Coca-Cola have managed to capture more than half of the Mexican bottled water market with their brands Bonafont and Ciel respectively.  PepsiCo also has a share of over 13% in this market. Dr. Pepper holds a small share in Mexico’s bottled water market, and lacks the brand recognition of Coca-Cola and PepsiCo is this region. Both Coca-Cola and PepsiCo plan to spend $5 billion in Mexico through 2018 to optimize operations, build manufacturing facilities and step-up marketing. This could further hamper sales of Dr. Pepper’s water brands in the country. The company also faces the threat of small local companies, which account for ~15% of the total volumes in the bottled water market at present.
Penafiel holds the second spot in the sparkling bottled water category behind Topo Chico. However, this category forms the smallest portion of the bottled water market behind bulk and still water. In fact, Dr. Pepper does not compete in the much larger jug/bulk water category, which is popular due to safety concerns related to tap water and daily household requirements of clean water.
The expected decline in CSDs in Mexico already poses a threat to Dr. Pepper’s growth in the country. A possible slowdown in the bottled water market as well could further drag down the company’s top line in the coming years.Notes:
- “It could happen: drinkable mexico city tap water“, January 2014, news.msn.com [↩]
- “Dr. Pepper 10-K“ [↩]
- “Size of the bottled water market in Mexico“, statista.com [↩]
- “Mexico’s soda pop ploy“, November 2013, nytimes.com [↩]
- “New soda tax makes Mexico a leading guardian of public health“, November 2013, huffingtonpost.com [↩]
- “Bottled water in Mexico“, March 2013, euromonitor.com [↩]