EUR 850.00 For Business Accounts Only

Morningstar | Scale in Mexican Beverage and Retail Market Has Helped Femsa Defend Its Competitive Edge

We think Femsa benefits from brand intangible assets and cost advantages stemming from its vast scale, both of which have allowed the firm to generate steady economic profits, with adjusted returns on invested capital averaging 14% over the last decade. The firm has been able to create synergies between subsidiary Cola-Cola Femsa (which contributes around 40% of revenue) and its commercial arm, which includes the Oxxo chain of convenience stores, as well as several pharmacies and fuel service stations, as these retail locations can prioritize selling Coca-Cola Femsa’s beverages while also leveraging these products’ brand strength to drive store traffic.Coca-Cola Femsa contributes the majority of the firm’s operating profits and is the largest franchise bottler, by volume, of Coca-Cola, representing roughly 12% of Coca-Cola Co.’s global volume. We expect that strong per capita sparkling beverage consumption in Coca-Cola Femsa’s territories (Mexico, Central America, and South America), combined with market share gains and product/packaging innovation, will enable this business to maintain its competitive edge over the next decade. While this segment is sensitive to changes in raw material prices, particularly for concentrate (about 40% of segment cost of goods sold), for which Coca-Cola Co. sets prices, and sweetener (25% of cost of goods sold), we think it will largely be able to pass some of these costs to consumers and offset margin pressure by improving utilization at its bottling facilities.Femsa also operates Oxxo convenience stores, the largest convenience store chain in the Americas based on the number of stores, and we think that this scale endows the firm with greater purchasing power and a more efficient distribution network than smaller competitors. The company has been able to maintain mid-single-digit same-store sales growth over the past five years despite increasing its number of stores at a roughly 9% clip over this time, which we think points to its ability to expand into attractive, underpenetrated markets.