Share of throat upside, down Mexico way

Mexico’s economy is in murkier water than the last deep recession of 1995, but, according to Euromonitor International’s upcoming global report on share of throat and wallet, there is significant upside for the soft, hot, alcoholic and dairy drinks industries to 2013.

Good times, bad times

It is widely lamented in Mexico that when Uncle Sam sneezes, Mexicans catch a cold.

And while it would be fair to say that there have been major benefits from Mexico’s gradual convergence with the US economy over the past decade and a half, over-dependence has been an ongoing concern for investors and companies alike.

The maths are simple: exports fuel one-third of Mexican GDP, and the US accounts for 85% of those exports, driven by NAFTA. It is a case of too many eggs in one basket.

Mexico’s vibrant informal economy is also highly dependent on economic health north of the border. Remittances sent home from the US are Mexico’s biggest source of foreign exchange revenue after oil and have a key multiplier effect in some of the poorest regions of the country, with upwards of 80% of the money going directly into consumption.

For the first half of 2009, this remittance flow was down by around 12% year-on-year. And the knock-on effect for internal demand is acute.

Neither is it a simple matter of Mexico mirroring the economic data in the US. In this instance, it is worse than that. For example, the US economy is forecast to contract in 2009 by between 2-3%, which is significantly less than in Mexico.

The disparity is rooted in Mexico’s high level of exposure to the worst performing areas of the US economy, notably manufacturing, which in mid-2009 was down around 15.5% year-on-year.

Youthful population is key to the future

There is little doubt that the macro-picture is bleak. Yet, only last month Coca-Cola and its Mexican bottlers announced they would be investing US$5 billion in Mexico over the next five years. At first sight, this looks like a bold position to take in a country suffering its worst recession since the dark days of 1995.

In fact, Coca-Cola’s confidence in Mexico is supported by Euromonitor International’s own forecast investigations in a new global report on beverage share of throat, in which Mexico is highlighted as one of the most attractive markets in the world for packaged drinks investment to 2013.

The key to confidence in Mexico’s beverage industries lies in the youthful population, which is, arguably, the country’s biggest asset. Although the population growth rate is slowing, the 20-59 age band is widening as a proportion of the total, with a tidal wave of Mexicans moving into adulthood year-on-year.

As a result, between 2009 and 2025 Mexico can expect to add around one million people a year to its labour pool. That demographic shift has hugely positive implications for adult-profile drinks categories, such as beer, hot coffee, hot tea, RTD tea and functional drinks. Equally, it is positive for the high volume multi-profile categories of carbonates, bottled water and milk.

 

Mexico: Key Packaged Drinks Growth Categories 2009-2013

Absolute Retail Absolute Retail Value Growth
Volume Growth (US$ Million)
(Million RTD litres)  
Bottled water 5,495 2,230
Concentrates 814 131
Milk 518 377
Carbonates 464 703
Fruit/vegetable juice 450 771
Beer 428 2,845
Hot coffee 179 125
RTD tea 93 120
Functional drinks 52 233
Hot tea 31 17
Drinking yoghurt 27 95
Euromonitor International
US dollar values are at fixed 2008 prices

Beer and water culture

By 2013, retail consumption of branded drinks is forecast to reach 67.5 billion litres, the highest level in Latin America according to Euromonitor International. This liquid consumption binge will be fuelled by over US$51 billion of spending.

Bottled water will continue to be a significant driver of demand, reflecting expansion of the bulk container home delivery market, which alone is forecast to generate around five billion litres of new business to 2013. The low margins and high distribution difficulty factor of large-sized containers (19 and 20 litres) can look daunting for companies outside the action, but the frequency of delivery to most households actually make it potentially one of the most value-enhancing drinks categories in the country.

The only category forecast to outperform branded water on spending is locally produced beer, which currently accounts for more than four out of every 10 Mexican pesos spent on packaged drinks. In the northern regions of the country, per capita beer consumption is extremely high, reflecting a strong daytime consumption culture.

Indeed, the North’s year-round hot climate and widespread availability of popular, competitively-priced brands have positioned cold beer as an increasingly aggressive competitor to mainstream soft drinks, especially carbonates.

Beer culture tends to be regional in profile, with specific brands popular in specific regions, for example Pacífico in the coastal areas, Victoria in the Valley of Mexico, Tecate in the Northwest, Carta Blanca in the Monterrey region, Superior in the South and Estrella in the Centre.

And although the beer market is run almost as a duopoly, between FEMSA and Grupo Modelo, there is no shortage of choice from economy to standard to premium segments. In fact, effective segmentation has been a lynchpin of the industry’s growth over the past 15 years.

Going forward, it would be a mistake to assume that alcoholic drinks do not compete with soft drinks, or even hot and dairy drinks. The reality is that every brand of packaged drink is competing for Mexicans’ daily allocation of liquid expenditure.

And as disposable spending power weakens over the short term, cross-industry competition for share of throat across Mexico’s broad spectrum of regions will become increasingly intense. Regular and functional drinking yoghurts, for example, have become a key competitor of mainstream soft drinks, fuelling a projected US$909 million market by 2013, which is over three-and-a- half times the size of RTD tea, itself a niche value-added category.

The Mexican economy is forecast to pull out of recession in 2010, provided that green shoots of recovery continue to sprout in the US. Growth will be supported by Mexico’s own increasingly strong macro-economic fundamentals as well as its highly favourable demographics.

And while GDP growth is unlikely to be spectacular, and almost certain to be slower than the higher flying emerging economies of China and India, there seems little doubt that Mexico will continue to develop as a first-tier focus of international investment activity.

Growth in packaged drinks volume is forecast to align with GDP performance to 2013, indicating an average annual increment of 3.5%, according to Euromonitor International’s new report. In real terms, that translates into upwards of two billion RTD litres of new drinks business each year. Coca-Cola has laid down its intent to seize a commanding share of that business. Despite the current period of economic doom and gloom, others need to make their own commitment or risk losing out.