Mexico is waging its very own battle of the bulge. The Mexican government is attempting to crack down on soft drink and junk food consumption by its citizens by imposing a tax on these food items. The tax adds about eight cents to the price of every liter of soft drinks, and a separate tax increases the price of snack foods by 5%. The tax is expected to impact sales of Coca-Cola (NYSE: KO ) and PepsiCo's (NYSE: PEP ) popular one-liter bottles. The proposal to impose the excise tax is currently being debated in Congress, while lobbyists from the food industry attempt to kill the bill.
The tax is being referred to as the "Bloomberg tax," after mayor Michael Bloomberg, who tried to pass similar measures in the city of New York. Basically, the Mexican government wants to curtail increasing obesity rates and diabetes among Mexicans by making soft drinks more expensive. Mexicans are estimated to consume 40% more soft drinks than the average American. The country has one of the world's highest obesity rates, and its mortality rates from diabetes are also very high.
Meanwhile, the soft drink industry is taking out newspaper ads that condemn the tax and discredit the notion that there is a direct link between soft drink consumption and obesity. The tax on the popular liter bottles of soda is problematic for the industry because it could impact the quantity and volume of soft drinks sold. Mexican lawmaker Javier Trevino told The Economist that Coke is concerned that if the tax succeeds in Mexico, it could spread to other countries in Latin America .
Soda makers' presence in Mexico and Latin America
Soft drink companies like Coca-Cola have major stakes in overseas markets, where an increasing number of their sales originate. In 2012, Coke's volume of unit cases sold outside the U.S. represented 81% of the company's worldwide unit case volume, versus 19% volume in the U.S.
For 2012, Mexico was one of the countries with the largest unit case volume, where unit case volume growth was 4% for the year . Coke's Latin American segment had unit case volume and concentrate sales growth of 5% each last year, the second highest growth after Eurasia and Africa. The growth is driven by the company's continued investment in its brands and the introduction of new products like Fuze Tea.
Unlike Coke, Pepsi has a snack food business that may also be affected by a tax on high-calorie junk food. Pepsi's snack food business is growing faster than its beverage line in developing markets like Mexico. The company has invested heavily in Mexico, and it is currently the second largest food and beverage business in the country. In 2012, Pepsi opened an R&D center to develop new products and increase the scale of its beverage business in Mexico. Mexico is part of Pepsi's emerging and developing markets segment, where segment net revenue increased over the last six years from 24% in 2006 to 35% in 2012 .
Junk food may also be subject to higher taxes
The tax also affects junk food. If the tax passes, foods that are high in sugar and calories will increase in price by 5%. One of Pepsi's competitors in the snack food segment, Nestle SA (NASDAQOTH: NSRGF ) , also has much to lose from the new tax. The company has been focused on growing its business in Latin America and Mexico.
Nestle's most recent nine-month sales out of Latin America were weak, which was driven by a slowdown in the area's economies due to inflation. The overall real internal growth in the segment comprised of North America and Latin America was 1.5%. Pricing was a major factor affecting growth in the region. In Mexico, the company's ambient dairy and culinary businesses had positive results. If the tax passes, the company may need to alter its marketing strategy or product lines to make up for a possible loss of customers .
My Foolish conclusion
The army of food lobbyists addressing this proposed tax is a sign that the food industry is concerned about the impact of this tax on its business in Mexico. If the tax succeeds, the possibility of similar measures being passed in other Latin American countries could also threaten sales in these markets. The food companies have a tough fight on their hands, as studies tend to show that eating high calorie and/or high sugar foods is one factor that contributes to rising obesity rates.
Others believe that a rise in prices won't easily change individual eating habits, and they cite the taxing of cigarettes as an example. While the price rose, people continued to buy. As the tax continues to be debated in the Mexican Congress, investors in the food space should watch for the outcome of this issue. It will be interesting to see how both consumers and food companies react if prices rise on these products.
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