FEMSA’s Latest Acquisition Shows Potential for Soft Drinks and Retail
Last week, Latin American bottler Coca-Cola FEMSA finalised its 51% acquisition of Coca-Cola Bottlers Philippines Inc (CCBPI) from the Coca-Cola Company. While FEMSA has been active in acquiring competing bottlers across Latin America, this marked the Mexico based company’s first foray overseas. And while challenges regarding distribution and supply chain efficiency will occupy much of FEMSA’s efforts, the profit opportunities outweigh much of the risk. But perhaps the most intriguing possibility lies not within soft drinks, but the opportunity to integrate beverage distribution with FEMSA’s other profitable endeavour: convenience store retailing.
Philippines present familiar market for Coca-Cola FEMSA
FEMSA owns a majority stake in Coca-Cola FEMSA, the largest independent Coca-Cola bottler in the world. With rights to sell Coca-Cola in over half of Mexico, all of Costa Rica, Nicaragua, Panama, Venezuela as well as Buenos Aires, Sao Paulo, Guatemala City and most of Colombia, FEMSA’s knowledge of carbonate production in Latin America is unparalleled. Through the bottler’s distribution, combined with the marketing strength of Coca-Cola, Coca-Cola branded carbonates represented 57% of off-trade volume in Latin America in 2012.
The move to acquire CCBPI is ambitious for FEMSA in that it is the first move outside of the Latin American market. However, it is an acquisition that makes sense given the company’s success in Mexico. As FEMSA CEO Carlos Salazar Lomelin stated in the press release announcing the purchase: “The market in the Philippines represents the expansion of our global footprint beyond Latin America, reinforcing our exposure to fast growing economies. It provides a unique opportunity to operate in a country with healthy growth prospects, dynamic internal consumption and an attractive socio-economic and demographic profile.” Similarities between the Philippines and many Latin American markets give FEMSA a decent understanding of distributing soft drinks. The influence of Western, and specifically American, cultures dates back to the military bases established in the Philippines post World War II. Retailing cultures, as discussed below, also mimic many Latin American countries. And finally, the growing economy of the Philippines is akin to the growth still being experienced across Latin America.
While the Philippines is not Southeast Asia’s leader in terms of per capita carbonate consumption (that distinction falls to Thailand with 39.2 litres consumed per capita in 2012), the island nation’s 31.5 litres per capita is still well ahead of Asia Pacific’s average consumption of 8.5 litres per capita (and far behind Mexico’s 119.0 litres per capita). Coca-Cola is the dominant global brand owner in the Philippines, with 74% of carbonate off-trade volume share for 2012. As such, FEMSA is taking control of a brand that already has strong identity with local consumers, allowing the company to use existing distribution relationships to further strengthen performance.
Economic growth prospects and Western habits indicate strong potential for Coca-Cola products in the Philippines. But carbonates may be nearing saturation as off-trade volume is expected to only grow at a pace of only 2.3% CAGR from 2012-2017. While FEMSA hopes to reverse this forecast with further carbonate promotions and deeper consumer penetration, the key for the bottler’s profits will be in creating a more efficient supply chain in both the manufacture and distribution of Coca-Cola. FEMSA inherited CCBPI’s twenty-three production plants in the country as well as a customer list of some 800,000 retailers. While no plans have yet to be announced regarding closings or expansions of facilities, FEMSA faces a new challenge in navigating distribution across the 7,107 islands that make up the archipelagic landscape.
FEMSA’s largest impact will likely come in the packaging of Coca-Cola branded beverages. Currently, about 70% of carbonates consumed in the Philippines are packaged in returnable glass bottles. These bottles are often returned to retailers for a small amount of money. This system creates a distribution network rife with complexity as consumers return bottles, which retailers in turn send back to the manufacturer. This practice was also common in many Latin American markets until FEMSA and other beverage manufacturers began using disposable packaging such as aluminium cans and PET bottles in place of glass. While disposable packaging increases manufacturing costs, the amount saved in the logistical nightmare of returnable bottles justifies the change.
FEMSA has already announced plans to integrate more disposable packaging for Filipino consumers, as well as addressing some of the increases in cost by raising unit prices amidst a growing economy. But doing so will have an impact, not just on the pack types offered to consumers, but the way Coca-Cola is sold by retailers. Similar to many Latin American countries, as well as Mexico’s own retail landscape in the 20th century, grocery retailing in the Philippines is primarily made up of traditional retail outlets, rather than modern grocery stores. While navigating local retailing custom may present a challenge for FEMSA in its distribution of soft drinks, there exists a large opportunity for one of FEMSA’s other business units: FEMSA Comercio, which operates Latin America’s largest convenience store chain. FEMSA has made no declaration of expanding OXXO into the Filipino market, but it cannot ignore the potential for such an endeavour.
FEMSA Comercio in unique position to develop convenience store channel
FEMSA’s experience in Latin America gives it an advantage in navigating evolving retail cultures due to the region’s amalgamation of traditional and modern retailing. In Mexico alone, traditional grocery retailers, such as independent small grocers like bodegas and kiosks, accounted for 46% of all grocery value sales in 2002. Since that time, the emergence of modern grocery retailers like convenience stores, discounters, forecourt retailers and supermarkets/hypermarkets has drastically changed the landscape. These modern channels now account for 64% of grocery retail sales in 2012, compared to a mere 54% ten years prior.
The emergence of convenience stores has been key for this evolution in Mexico. In 2002, 3,433 outlets existed in the country. In 2012, that number has increased to 12,720. Leading the way is FEMSA’s OXXO store with 9,187 outlets. Unlike supermarkets and hypermarkets, these stores do not occupy much space, yet still provide the wealth of goods and services that were once provided by small grocers. The stores are also popular amongst younger consumers who, when out at night, are looking for a quick spot to grab food, cigarettes, alcohol, or a Coca-Cola. FEMSA Comercio, the FEMSA division responsible for OXXO, has aggressive plans to expand OXXO outlets in regions such as Colombia, where traditional grocers still dominate grocery retailers.
As FEMSA works with local retailers in the Philippines, it will discover a retailing landscape similar to 20th century Mexico and Colombia of today. In 2012, Filipino traditional retailers accounted for 75% of grocery retail sales. The majority of these stores are neighbourhood sari saris, which are small corner stores where Filipinos can make daily trips for groceries and other items. In examining supply chain efficiencies and consumer habits in order to better distribute Coca-Cola products, FEMSA is in a unique position to explore extending the OXXO concept overseas. Convenience stores are still relatively nascent in the country with only 1,255 outlets in 2012. 7-Eleven has a presence with 815 stores, but the format is still an emerging concept. Many stores are limited to Metro Manila and other Luzon provinces and have yet to catch on in the more remote parts of the nation. But, via the work in analysing distribution channels as it pertains to Coca-Cola, FEMSA will have a unique perspective on why these traditional retailers are popular and can incorporate them into the OXXO model. Thus, while working on ways to better produce and sell soft drinks, FEMSA may spark a retail revolution of its own.
The Coca-Cola Company’s sale of CCBPI to FEMSA underscores a growing trend of soft drink manufacturers seeking stronger franchise partnerships with their bottlers. PepsiCo’s agreement with Tingyi-Asahi Beverage Holdings in regard to distribution in Myanmar is another example of a global brand working hand in hand with bottlers to grow soft drink performance. These partnerships allow global brands to focus on global marketing efforts and brand ubiquity, while allowing more experienced bottlers to handle logistics and manufacturing. But, should FEMSA’s retailing efforts prove successful in new markets, Coca-Cola’s has a tailor made retail player that has a vested interest in promoting the sale of Coca-Cola products. And in a global climate where distribution in growing markets often determines the category leader, such a partnership is well worth the investment.