Flat beverages are helping overall sales at Coca-Cola Co and PepsiCo Inc stay fizzy in Mexico despite a tax on sodas.
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As Mexico moved toward implementing a soda tax to combat soaring rates of obesity and diabetes three years ago, the beverage industry fought back hard, warning that sales in the world’s No. 2 consumer of sugary drinks could take a hit.
But more than two years later, PepsiCo and Coca-Cola have found ways to prosper in Mexico thanks to alternative beverages and resilient demand, a Reuters review of corporate filings and executive comments shows.
On Thursday, PepsiCo Chairman and Chief Executive Indra Nooyi described the nation, the biggest for net revenue after the United States, as “one of the brightest stars” in Latin America amid turmoil in Venezuela and Brazil.
“We feel good about our business in Mexico,” she said in the company’s second-quarter earnings call.
PepsiCo’s shares popped to record highs on Thursday after its earnings of $1.35 a share beat analyst estimates.
After the tax was implemented in January 2014, beverage sales volumes declined for one quarter in Pepsi’s case and two quarters for Coke.
Since then, both have posted consistent growth in volumes in Mexico. Coca-Cola and PepsiCo both declined to comment.
Growth in other drinks the companies produce, like bottled water and juice, has contributed to that resilience. General economic growth in the country has also helped.
As U.S. municipalities and states, as well as other countries, increasingly entertain the idea of slapping a tax on sugary drinks to help combat obesity and diabetes, the sales bounce-back in Mexico suggests that such policies are not necessarily calamitous for major beverage companies.
Mexico is the biggest country with a nationwide tax on sugary drinks, and the outcomes in terms of health and revenue are closely studied by public health researchers and industry groups alike.
Soda taxes are a concern for the sugar industry, which is worried about waning long-term demand for sweeteners.
The companies’ growth in sales volumes has come as individual Mexicans drink less soda – a sign the tax is having its intended effect, public health advocates say.
Mexico’s per-capita consumption dropped 4 percent to 134 liters in 2014, according to data from market research firm Euromonitor. It continued to fall in 2015 and is forecast to inch down in 2016 to 132.2 liters per capita.
Bottled water consumption, meanwhile, has soared 50 percent in the past decade.
That mirrors declining soda consumption elsewhere in the world. The leading producers are well aware of this and have been diversifying accordingly.
In 2010, still beverages – including waters, teas and juices – represented just 29 percent of Coca-Cola’s U.S. volume and 22 percent elsewhere, a company filing shows. Sparkling beverages, namely sodas, made up the rest.
By 2015, still beverages made up a third and 26 percent of U.S. and worldwide sales volume, respectively.
“It’s not just a carbonated soft drink game anymore,” said Adam Fleck, an analyst at Morningstar in Chicago.
‘JUST THE BEGINNING’
Despite the per-capita decline, overall soda volumes are bubbling up. After falling in 2014 and 2015, volumes grew 2 percent between January and April of 2016 compared with the same period a year earlier, according to Anprac, Mexico’s national beverage industry association.
The per-capita drop is also leveling off, as the tax’s sticker shock wears off.
Despite the refreshing news, the industry has maintained opposition to soda taxes elsewhere. That could reflect concern that taxes are “just the beginning” of public policies aiming to reduce soda drinking, said Jeff Grogger, a University of Chicago economist who studied Mexico’s tax.
“They have lots of ways to mitigate the financial impact,” said Duane Stanford, the editor of Beverage Digest. “But you have to look long-term too and you want to protect your competitive landscape.”
(Additional reporting by Chris Prentice in New York; Editing by Matthew Lewis)