Mexico the New El Dorado For Soft Drink Giants

It seems like soft drink powerhouses Coca Cola Co (NYSE:KO) and PepsiCo (NYSE:PEP) are betting heavily on Mexico as both the companies recently announced huge investments in the country. Mexico has one of the highest obesity rates in the world and the government has undertaken several measures to promote a healthier lifestyle. Major Food & Beverage (F&B) companies are hoping to leverage the incentives provided by the government to build a healthy portfolio in the region. Besides these two, Dr Pepper Snapple (NYSE:DPS) has also made significant investments in the country and is witnessing a healthy revenue growth.

We maintain a price estimate of $71, which is about 8% above the current market price.

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Pepsi Pumps in $300 million

PepsiCo recently announced its plan to invest $300 million through its Mexican subsidiary Sabritas SRL de CV to bolster the healthy snack segment and to set up a product research center on healthier snacks. The new center will provide research not only for its products in Mexico but for the global portfolio of products as well. ^[1] It is a step in the right direction as we expect governments around the world to crackdown on companies promoting obesity. Besides, more people will align themselves with products they view as healthy or natural.

Frito-Lay dominates the North American snacks market commanding a market share of more than 65%. We expect the figure to rise to 65.8% by the end of the Trefis forecast period. Given the fact that the North American snacks market is huge and slated to grow at a healthy rate, this is a significant revenue addition for the company.

Coca Cola to Spend a Whopping $1 Billion

Coca Cola announced its decision to spend $ 1 billion in Mexico this year. Although the investments will be spread across the portfolio, the company intends to put a greater focus on bottled water. Bottled water is a huge market in Mexico and the country consumes 243 liters per person in a year, compared to the U.S.’s 110 liters. Moreover, we expect the bottled water market to rise to $13 billion, up from $9 billion presently. ^[2]

Coca Cola operates in the bottled water market in Mexico through its brand Ciel. Soft drink sales have been affected in the country due to harsher regulations by the officials on the beverage companies, including banning the sale of soft drink in schools. Currently, the bottled water is available in single serves, which refer to 1 liter or 1.5 liter bottles, and jugs, which come in 10 or 20 liters. The companies plan to focus heavily on the single serves since their price, on a per unit volume basis, can be 10 times more than the jugs. Coca Cola also plans to extend Ciel to incorporate new flavors. ^[2]

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1. PepsiCo invests in growing healthy snacks segment in Mexico, smartplanet.com, January 31, 2012 [↩]
2. How Coke and Dannon Are Fighting To Dominate The World’s Largest Bottled-Water Market, Forbes, 31 Jan, 2012 [↩] [↩]