A Look At Sabritas As PepsiCo Steps Up Investment In Mexico

PepsiCo (NYSE:PEP) has announced a $5 billion investment in Mexico, in addition to the $3 billion already invested in the country since 2009. ^[1] The company’s Latin America Foods (LAF) division has grown more than every other food and beverage division in the last couple of years. In 2012, while the overall organic growth for PepsiCo was 5%, LAF grew by an impressive 14%. This division further grew by 13% through September 2013, whereas the company managed a 4% growth. ^[2] Not only is Mexico a major consumer of beverages, it also has a large appetite for sweet and savory (or salty) snacks. According to PepsiCo, even if the per capita consumption rate of salty snacks for Brazil, India or China is doubled, their consumption levels will be much below those of Mexico. With a growing middle-class and increasing disposable incomes, PepsiCo looks to further expand its snacks business in the country.

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Snacks Division ‘Sabritas’ Leads The Way For PepsiCo

The Mexican salty snacks market grew at a CAGR of 7.4% during 2008-2012 to $5.1 billion in 2012. ^[3] In comparison, the U.S. savory snacks market is worth over $30 billion. Salty snacks is a mature market in the U.S., which is expected to grow moderately by 3.5% through 2017. On the other hand, Mexico is still an emerging economy with increasing disposable incomes. The government expects the economy to expand by 3.9% this year, up from 1.3% in 2013. Owing to this acceleration in economic development and a widespread habit of snacking, the Mexican savory snacks is expected to grow at a CAGR of 6% to reach nearly $7 billion by 2017.

According to our estimates, the snacks division in Mexico contributed over $3.5 billion to the overall revenues for PepsiCo in 2012. Sabritas is the brand under which the company sells its Frito-lay snacks such as Doritos, Tostitos, Cheetos, as well as other products specific to the Mexican market (Rancheritos, Sabritas, Turbos Flamas, Pizzerolas and Sabritones). Sabritas dominates the country’s salty snacks market with ~80% of the share, followed by Barcel, a maker of tortilla potato chips and other snack brands, with only 12% market share. ^[4]

Potential Obstacles To The Growth Of Sabritas

Given the current scenario, sales of PepsiCo’s salty snacks in Mexico could reach nearly $4.7 billion a year beginning in 2017. However, certain factors may deter the growth rate of this category.

• Tax Imposed On Junk Food:

In a bid to tackle health problems, the government of Mexico announced significant new taxes on junk food late last year. These taxes will increase the price of foods high in saturated fat, sugar and salt by 8%. ^[5] This tax will be passed on to consumers, and thus raise prices of savory snacks, as companies will look to maintain margins. A hike in prices might slowdown demand for snacks in Mexico.

• Alarming Obesity And Diabetes Rates:

Large consumption of snacks with high amounts of trans fats and saturated fats is closely followed by health risks such as high cholesterol levels. Mexico has the world’s highest obesity rate of 32.8%, followed by the U.S. with 31.8%. In addition, Mexico also has a high diabetes rate (percentage of population with diabetes) of 9% as of 2012, compared to a 7.7% diabetes rate in the U.S. ^[6] With a growing threat to public health, the President of Mexico, Enrique Peña Nieto, has called for a “change in culture” in the country, urging people to live a healthier lifestyle including an hour of exercise each day.

With plans to invest $5 billion in Mexico, PepsiCo has cemented its intentions to further expand into the country. The company has also announced four key focus areas: infrastructure, community development, relationship with local farmers, and innovation and brand building. Although snacks are already hugely popular in Mexico, there are certain less developed parts of the country where consumption is still relatively low but incomes are rising at a fast pace. Thus, we can expect PepsiCo to further strengthen its distribution channels and penetrate deeper into Mexico in the next few years, in order to boost its snacks business in the country.

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1. “Pepsi announces plans for $5 billion investment in Mexico“, wsj.com [↩]
2. “PepsiCo 10-q“ [↩]
3. “Savory snacks in Mexico“, October 2013, reportlinker.com [↩]
4. “Sweet and savory snacks in Mexico“, December 2013, euromonitor.com [↩]
5. “Mexico to tackle obesity with taxes on junk foods and sugary drinks“, theguardian.com [↩]
6. “Health battle over soda flares in Mexico“, August 2013, wsj.com [↩]