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The Mexican government has adopted some of the strictest controls on energy drinks in an attempt to curb adolescent consumption – the question is will it work?

Energy drinks entered Mexico in 2002 and have experienced explosive growth over the past decade, with the industry reaching nearly US$615 million in sales in 2011. The products are targeted primarily to teenagers and young adults, as the products frequently allow young people to stay awake to study or party. However, in recent years there has been a backlash against these products, both at a national and global scale, as many claim that excessive consumption of energy drinks or mixing energy drinks and alcoholic beverages have caused the hospitalization or death of young people worldwide. While many previous attempts to regulate the drinks in various countries are in response to a particular highly publicized fatality rate or incidence of severe injury, in Mexico, no particular incident triggered the backlash. Negative health claims are based on studies conducted by the Secretary of Health and the Federal Commission for the Protection against Sanitary Health whose studies show that consumption in excess causes negative effects on mental and physical health, affecting the central nervous system and cardiac functioning and can even lead to death.

Regulations

Starting in 2011, a new IEPS (special tax for production and services) tax was established on energy drinks, accounting for 25% of total production costs, the same rate as beer and wine. Manufacturers of energy drinks were forced to pass this cost on to consumers, with some brands such as Bomba energy drink registering a 30% unit price increase during 2011. Local subsidiaries producing and bottling energy drinks, including Peñafiel Bebidas and Embotelladora Garci-Crespo, claimed that this was unconstitutional and brought this case to the Supreme Court, but the decision was upheld by the court in February of 2012.

In October of 2011, the Mexican Senate officially banned the sale of energy drinks mixed with alcoholic beverages by all bars and restaurants. A popular combination, generally Jägermeister mixed with energy drinks, is known in Mexico as a “perla negra” or black pearl and is popular amongst young people.

In February 2012, the Mexican Senate voted to prohibit the sales of energy drinks to anyone under the age of 18, giving the products the same age restrictions as alcohol. The same law requires that energy drinks carry warning labels cautioning buyers about the risks of over-consumption.

These restrictions make Mexico among the strictest countries in the world in their regulation of energy drinks. While some European countries, such as Norway and France, had banned Red Bull, they were forced to reinstate the products in 2008 and 2009, respectively, in order to comply with European Union regulations, which prohibit restrictions on any products sold or produced in other EU countries absent a proven health risk. In November 2010 the US Food and Drug Administration (FDA) sent official letters to companies warning them to stop adding caffeine to their alcoholic beverages or risk seizure after a highly publicized incident where excessive consumption of Four Loko, a malt-based alcoholic beverage with added caffeine, was linked to the death of several young adults. The product was reformatted to remove the caffeine and returned to the shelves in 2011. Several tax increases on energy drinks and other sugary beverages have been suggested at the local, state and national level in the United States but few have been passed.

Implications

What impact, if any, will these regulations have on the energy drinks market in Mexico? The new taxes have already been put into effect and resulted in an average unit price increase of 27% in 2011. As these products are already considered expensive and thus far have been out of the reach of most lower and lower middle income consumers, further increasing unit prices may restrict the spread of energy drinks among these groups, which make up the majority of the Mexican population. Gladiator, Coca-Cola’s energy drink, is the cheapest major brand of energy drinks has been growing its brand share by targeting this untapped market. However, the tax hike caused the price to jump from Mx$51/litre in 2010 to Mx$66/litre in 2011 – still far cheaper than Red Bull (Mx$108/litre in 2011) but this 29% increase may slow this brands growth by keeping it out of the hands of the lower income and discourage further low cost brands from emerging to target this segment.

Regulations on the sale of energy drinks mixed with alcohol or to minors will only be as strong as their enforcement and such restrictions will be quite difficult to enforce. The sale of cigarettes to minors is also prohibited in Mexico, yet one out of every ten smokers in Mexico is underage due to lack of enforcement by retailers and police. It is unlikely that this ban will keep energy drinks out of the hands of teenagers entirely but is likely to slow growth rates in coming years. This strict regulatory environment may discourage new brands from entering the market or further product innovation. While it may be difficult to enforce the sales of alcohol mixed with energy drinks in commercial establishments, this law will prevent pre-mixed alcoholic energy drinks such as Four Loko from entering the Mexican market and sales of energy drinks through on-trade establishments is expected to fall over the long term as well.

While products targeting teens and young adults are becoming increasingly regulated, the market is wide open for products like 5-Hour Energy in the United States which targets young to middle aged professionals seeking an extra energy boost during the day. While such products would still be subject to the high tax rates, they do not receive the same backlash as traditional energy drinks as they are not meant to be consumed with alcohol and adults are likely to be more responsible about consuming them in moderation.

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