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This Beverage Giant Invests Billions in Mexico

July 20, 2014 | About:

The Coca-Cola Company (NYSE:KO) and its bottling partners in Mexico announced a joint, six-year investment of $8.2 billion at a ceremony commemorating the world's largest food-grade polyethylene terephthalate (PET) bottle-to-bottle recycling plant. Coca-Cola began operations in Mexico 88 years ago.

What This Investment Will Mean

The investment, which will be made from 2014 to 2020, will boost Coke's infrastructure and production capacity in Mexico, create more jobs and drive innovation to continue expanding our beverage portfolio. This investment also will help develop new environmentally sustainable technologies and expand various social and community projects, with a special focus on promoting physical activity and well-being. It will bring the Coca-Cola system's total investment this decade to more than $12.4 billion.

Francisco Crespo, president of Coca-Cola Mexico, made the announcement during the inauguration ceremony of the PetStar recycling plant, which doubles its previous processing capacity to 65,000 tons of PET bottles per year. The Coca-Cola system invested more than $100 million to expand the facility.

With the announcement, the Coca-Cola System in Mexico will be able to continue its efforts to promote integral wellbeing of the population; increase its infrastructure and production capacity; create more jobs; innovate and continue to develop its portfolio, which includes 70 brands and more than 500 products.

Soda Companies Undergoing Through a Rough Patch

Coca-Cola and other beverage companies are facing a difficult time as carbonated beverage sales are slowing down, in 2013, the US saw its soda sales volume decline by 3% on a year-over-year basis, while revenues were down 1% over the same period. The decline has been accelerating since 2011 owing to the strong and growing influence of health consciousness amongst consumers.

To counter this slowdown, Coca-Cola has been focusing on markets outside the US. However, the company did not get the best news from Mexico at the start of the year; Mexico has placed a new 12% tax on sugary drinks, which include sodas, juices, and teas. The impact of the tax has already caused a 5% volume decline for Coca-Cola FEMSA in February.

The tax was imposed in order to reduce obesity-related diseases and move towards healthy drink choices. Two-thirds of the adult population of Mexico is classified as overweight, increasing the risk of diabetes and cardiac diseases.

Coca-Cola’s investment comes despite a government soda tax introduced at the start of the year to try to combat an obesity epidemic. But in an ironic move, that could leave a bitter taste in Coke’s mouth, the Mexican government is now introducing limits on TV advertising for high-calorie food and soft drinks.

In spite of this, Coca-Cola has not shied from maintaining its Mexico investment — an amount estimated to represent 5% of its total revenues. Furthermore, its competitors in the soft drink market have also announced to either maintain or increase their spending in Mexico.

To Put the Pieces Together

Coca-Cola, which has operated in Mexico for 88 years, is one of the country's largest employers, generating more than 90,000 direct jobs and 800,000 indirect jobs. PetStar generates 1,100 direct jobs and 24,000 indirect jobs in Mexico. This is definitely going to bring big boom in shares of KO. For more than four decades, the Coca-Cola system has supported the recycling industry. That is why today, millions of PET bottles are made with up to 100 percent of recycled material. The PetStar plant is a clear demonstration of the Coca-Cola system’s commitment to the environment in Mexico.

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