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July
28
2020

Coca-Cola Confronted by Big Problem in its Second Largest Market. For Once, Political Connections Failed. Oct 1 is the Date
Wolf Richter

Per-person consumption of soft drinks in Mexico is the highest in the world. But due to link of obesity to Covid deaths, sugary drinks now face their nemesis.

When billions of people are forced to hunker down at home for months on end, unable to visit their favorite restaurants, bars, nightclubs, theme parks or other leisure venues, they tend to drink fewer soft drinks, as the Coca-Cola Company can attest. In the second quarter, when roughly a third of the world population was put through some form of lockdown, the company’s global revenues slumped 28% year-over-year, to $7.2 billion. It was its largest drop in quarterly revenue in more than 30 years.

By contrast, in Mexico, Coca Cola’s second largest global market after the U.S., sales fell by only 5%. That relatively modest decline was caused by the slumping business at restaurants and at street food stalls, where Coke is the ubiquitous (and invariably cheapest) beverage of choice for washing down tacos, tortas, tamales and the like. Many construction and other manual workers — a key customer segment — have been temporarily laid off since the country’s semi-lockdown began. But apparently, many of those folks bought their coke at the store and drank it at home.

On a per-person basis, Mexico consumes more Coke than any other country in the world, and twice as much as the U.S.

Loving Coca-Cola (a Little Bit Less)

Mexico is also home to independent bottler Coca-Cola FEMSA, which bottles and distributes Coca-Cola and other soft drinks across vast swathes of Latin America, including half of Mexico (and also in the Philippines). Roughly one out of ten of all Coca-Cola products sold in the world is distributed by Coca-Cola FEMSA, making it the second largest Coca-Cola bottler in the world, after Coca-Cola Enterprises.

Business is down. In the second quarter, Coca-Cola FEMSA revenues fell 10.2%. But in Mexico, Coca Cola FEMSA’s revenues fell only 5.6%.

There’s also Arca Continental, which manufactures and distributes Coca-Cola beverages and other products in Northern and Western Mexico, Ecuador, Peru, Northern Argentina, and Southwestern United States. It is the second-largest Coca-Cola bottler in Latin America. Net sales rose 2.3%. So they’re hanging on during the pandemic in Mexico.

The New Threat on the Horizon.

But for the Coca-Cola Company, and for the bottlers, fast approaching on the horizon is a threat that could exact a significant long-term toll on sales in Mexico.

That threat is the Mexican government’s junk food label law. Passed in October 2019 and scheduled to come into effect on October 1 this year, the law requires all food packages with contents high in sugar, sodium or saturated fat to carry clear health warnings on the front.

A similar labeling law was passed in Chile in 2016. The new legislation included the world’s strictest limits on how and where food companies can advertise junk food to children. It worked like a dream — and was a nightmare for the companies affected: Over the next two years, sugary drink sales plunged by 23%.

So successful was the experiment that almost a dozen countries, including Mexico, are interested in replicating it.

“The reductions we observed in sugary drink purchases were markedly greater than those seen following the implementation of standalone policies – such as a tax on sugar-sweetened beverages – elsewhere in Latin America,” said Lindsey Smith Taillie, assistant professor of nutrition at the Gillings School who led a study on the impact of the legislation.

Understandably panicked at the prospect of something similar transpiring in Mexico, a country almost seven times larger than Chile, processed food and beverage companies have mobilized their forces to try to derail, or at least postpone, the application of the labeling law. But to no avail. In every court case, the presiding judges have sided with the government.

The arrival of Covid-19, which has proven to be particularly lethal to people with three comorbidities — obesity, diabetes and hypertension — has strengthened the government’s case and resolve. In Mexico, nearly a third of all adults are obese, according to the OECD, making it the second-most obese of the 36-country group, after the U.S. Roughly a quarter of the 40,000 Mexicans registered to have died of Covid-19 were obese, according to government statistics, 37% had diabetes, 43% hypertension.

Changing Times

Going all the way back to the 1970s, the Coca-Cola Company has generally enjoyed extremely close ties with the Mexican government. At a conference on foreign investment in 2016, former president Enrique Peña Nieto proudly divulged that he drinks Coca-Cola Light every day. Vicente Fox, who served as president from 2000 to 2006, was formerly a long-time employee of the Coca-Cola company, having scaled the ranks from local salesman to president of the company’s Latin American division.

But times are changing. In a recent visit to the poverty-hit southern region of Chiapas, where more Coke is consumed than in any other state, Hugo Lopéz Gatell, the virologist leading the government’s pandemic response, likened the risks of consuming junk food to those of consuming alcohol and tobacco. He described sugary drinks as “bottled poison” and packaged cakes and crisps as “toxic food”:

“The evidence is very clear, but in previous administrations special interests have ensured that the information is concealed,” he said. “But the products that do harm, do harm; and we have to discourage their consumption so that fewer people are unhealthy.”

Founder, Wolf Street Corp, publisher of WOLF STREET.

In his cynical, tongue-in-cheek manner, he muses on WOLF STREET about economic, business, and financial issues, Wall Street shenanigans, complex entanglements, and other things, debacles, and opportunities that catch his eye in the US, Europe, Japan, and occasionally China.

Wolf lives in San Francisco. He has over twenty years of C-level operations experience, including turnarounds and a VC-funded startup. He has a BA, MA, and MBA (UT at Austin).

In his prior life, he worked in Texas and Oklahoma, including a decade as General Manager and COO of a large Ford dealership and its subsidiaries. But one day, he quit and went to France for seven weeks to open himself up to new possibilities, which degenerated into a life-altering three-year journey across 100 countries on all continents, much of it overland, that almost swallowed him up.

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