Coca Cola (NYSE:KO) recently released its second quarter results and made a big announcement claiming that it will invest approximately $8.2 billion in Mexico over the next six years along with its eight local bottlers.
Earlier this year the government of Mexico had introduced soda tax on fizz drinks so as to overcome the obesity epidemic in the country. They had started this tax on high calorie soda items so that they could prevent diabetes. Mexico is a place where every third person, be it an adult or a child, is suffering from high rate of diabetes. Despite the tax, Coca Cola has still taken this step as a part of a long term business proposal. It is a very big risk taken by the company.
The money invested will be spent on production lines, refrigeration equipments, trucks and distribution centers. They have also planned to focus mainly on natural sweeteners for which they will open up a laboratory for Latin America by the end of this year.
- Warning! GuruFocus has detected 8 Warning Signs with KO. Click here to check it out.
- KO 15-Year Financial Data
- The intrinsic value of KO
- Peter Lynch Chart of KO
A Fruitful Year
Mexico has the third largest population of America, around 110 million people. It is also the second largest global market of Coca Cola in terms of its per capita sales. This year has been a good one for Mexico in terms of investment influx. Nissan has also announced that they will invest $1 billion for the set up of a luxury car plant.
BMW also announced that they too will invest $1 billion here during the year for the setup of a factory. Mexican business leaders have also decided that they will invest $27 billion in the development of infrastructure, mining, telecom, and the IT sectors.
What Coca Cola Plans to do
Out of Coca Cola’s 500 brands 40% of them are zero calorie or is low in calorie products. The beverage giant is focusing on many programs so that they can easily reach out to the population of Mexico. According to the Reforestation program initiated by the company, Coca Cola would have to plant 60 million tress in Mexico by the end of this year. Their “Ponte al 100” program aims to re-educate 22 million students of Mexico for improved habits and better lifestyle. The PET recycling plant in Toluca expanded and offered employment to many natives of the country.
Coca Cola’s biggest rival PepsiCo (NYSE:PEP) has also invested billion in Mexico after the increment of the soda tax. They have committed to invest $5 billion in the country in the next five years. PepsiCo products like Sabritas Potato Chips also did well in the Mexican market even though an 8% tax was implemented on it because of calorie packaged food. Switzerland based Nestle also decided to invest $1 billion in the place. Previously all daily usage items and snacks were tax exempted, but now the government is seeking to raise tax revenues from such sources.
Mexico has become the hub of investment for all the global companies, from beverage giants to automobile. Coca Cola, too, has followed the trend. This deal was done because the sales of carbonated soda drink has been falling gradually. To counter this slowdown, the beverage behemoth has taken these steps. Though after their investment plan was released, Mexican government has set limits for TV advertising of high calorie food and soft drink. So what remains to be seen is whether the company is able to attract the health conscious people of Mexico.