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TheStreet Open House

Coca-Cola Femsa Hit By Mexico Junk Food Tax as Volumes Decrease

Stocks in this article: KOFKO

NEW YORK (TheStreet)-- Coca-Cola FEMSA (KOF), the world's largest independent bottler of Coca-Cola (KO), announced its second-quarter results this week highlighting higher revenue and the acquisition into Brazil and Mexico.

FEMSA also cited weak volume which the company suggests is the result of a controversial food tax passed last year in Mexico when the country's legislature passed a 5% tax on "junk food" and a 1 Peso (roughly $0.08 U.S.) per liter tax on soda.

The purpose of the tax is to curb soda consumption, where according to the Organization for Economic Development Co-Operation and Development, some 69.5% -- compared to the U.S.' at 69.2% -- of the total population over the age of 15 is either overweight or obese. That ranking gives Mexico the dubious distinction of being the country with the worst weight problem in the world.

The spike in obesity has resulted in higher rates of diabetes and other health related problems throughout the country. 

According to the quarterly report, total revenues increased 14.3% due to mergers and acquisitions in Brazil and Mexico, revenue growth in Venezuela, Central American, Colombian, and Brazilian operations.

However, excluding the impact of mergers and acquisitions, the company experienced a 2.8% decrease in volumes attributing it to the "new tax environment as well as bad weather conditions" in Mexico.

Although it is still too early to see what impact the bill has had on Mexico's fight against obesity, Sanford Bernstein analyst Ali Dibadj suggests volumes have indeed been affected.

"Volumes have definitely been impacted by this tax and the company expected this, but this decrease is actually much better than what the company expected," Dibadj said in a phone interview.

Coca-Cola FEMSA expected sales volumes in Mexico to drop between five and seven percent this year as a result of the tax, reports Reuters

Edward Jones analyst Jack Russo agrees. "Coca-Cola's Mexican business was much lighter than usual. With the company's high market share in the area at about 50-60%, a value added tax can and has definitely had an impact on the market." 

What could this tax mean for Coca-Cola in the long run? Dibadj suggests, "covering soft drinks over time we will continue to see pressure [in the forms of price increases and taxes] but we are also seeing room for companies and different groups to create new products that can combat these pressures." 

Competitors, Arca Continental and Organizacion Cultiba-a Pepsi bottler, also noted similar sale declines in the region.

Many might think back to Michael Bloomberg's 2009 campaign to tack on a penny-per-ounce tax on sodas and other sugary beverages in order to combat obesity and health related issues but with this proposal like many others in the U.S., the proposal faced outcries from the public and advocacy groups and was later abandoned.

In New York, The Coca-Cola Company (KO) is up .21 at 41.03. 

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