How Will Coca-Cola's Mexico Launch Impact The Stock?

| About: The Coca-Cola (KO)

Summary

After the positive response received from Argentina, Coca-Cola now plans on launching Coca-Cola Life in the United States and Mexico.

In response to poor health conditions of the population, the Mexican government had announced an increase in the tax on sugary beverages.

While the situation in the country looks bleak for Coke, Femsa, the largest bottler for the company also experienced a 6.4% decrease in its sales.

Beverage sales are overcast with the concerns of obesity and artificial flavoring in the global market. Further, sales of carbonated soft drinks, CSDs, have experienced a slowdown in many parts of the world. Despite these issues, beverage giant Coca-Cola (NYSE:KO) continues to stick to its roots of not altering taste and quality of its products, but instead aim to look for an alternate solution to address the concerns of skeptical consumers.

Coca-Cola Life, a naturally sweetened soft drink aimed at calorie conscious consumers, made its debut in Argentina and Chile last year, and in U.K. earlier this year. Despite the poor economic conditions in Argentina, the introduction of Coca-Cola Life led to a 7% increase in beverage volumes for the company. After the positive response received from Argentina, Coca-Cola now plans on launching Coca-Cola Life in two of its largest markets, the United States and Mexico. The drink is scheduled to be on shelves by early September.

Decline of CSD sales in Mexico this year

Mexico currently represents 5% of the global annual sales for Coca-Cola. Coming in at second place by representing 13% of the overall volumes of the company last year, its per capita consumption is about 1.85 times higher than that of the United States, a market that accounted for 19.7% contribution to sales volumes a year ago. Up from a growth rate of 1.3% in 2013, economy of Mexico is expected to grow at the rate of 3.9% this year. Based on this, sales volumes for CSD are set to experience growth because of the increase in disposable incomes of the people. Having said that, Mexico is also one of the most obese nations across the globe. More than 70% of its adult population is overweight and about 15% of people above the age of 20 suffer from Type 2 diabetes in the country.

In response to poor health conditions of the population, the Mexican government had announced an increase in the tax on sugary beverages to about one peso a liter which was effective from January 1 of this year. The said tax increased beverage prices by about 8%. Given that more than half of Mexico's population resides below the nations poverty line, such a price increase discourages price sensitive consumers from making purchases. As a result of this, the company recorded a 3% decrease in net volumes in Mexico in its second quarter. PepsiCo, a company that Coke has been competing with for beverage supremacy for more than a century now, experienced an increase in its CSD volumes in Mexico, with a 3% growth in volumes in the Latin American region in the second quarter.

Coca-Cola's bottler takes a hit

While the situation in the country looks bleak for Coke, Femsa, the largest bottler for the company also experienced a 6.4% decrease in its sales throughout the month of June after the announcement of the tax by the Mexican government.

Coca-Cola Life expected to revive Mexican volumes

In response to the dismal volumes that Coke witnessed in its second quarter, it is set to launch Coca-Cola Life in two of its large volume markets, United States and Mexico by September. The drink uses stevia, a natural sweetener, as an ingredient and is a low calorie drink. A 12 ounce can of Coca-Cola Life contains about 16 grams of sugar and has 64 calories. That is roughly half of the sugar and calories that are found in the original Coke. The drink is expected to fare well in the market among skeptical consumers based on these facts. The drink is aimed at adults over the age of 30 who are health conscious. Alongside that, the beverage also aims at providing consumers with an eco-friendly experience, given that the plastic bottles are made up of 30% plant resin. These are the perceptions that the company will base its launch on in order to boost sales volumes in the country.

The launch is set to take place at one of the most challenging times in the Mexican market when a heavy tax has been announced by the government on all sugary beverages. Furthermore, Coke seems to be relying on its experiences in Argentina to boost sales in the Mexican market.

Conclusion

The launch of Coca-Cola Life received a positive response in Argentina. If the same comes into play in the Mexican market, sales volumes are expected to recover after the launch of Coca-Cola Life and boost earnings for the company, at least in the Latin American market. Consumer brand loyalty and the positive perception that Coca-Cola Life is bringing with itself into the Mexican market makes the company hopeful about the response that the launch will be met with once the product hits the shelves.

According to the director of Coca-Cola in Mexico, Jose Luis Basauri, global tastes of consumers always evolve and Coca-Cola also needs to evolve just as its consumers do. He added that the testing response of Coca-Cola Life in the Mexican markets was given a thumbs up for its concept and taste, while most of the consumers inclined towards the product had an average age of 30.

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