As filed with the Securities and Exchange Commission on April 27, 2012.21, 2015
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
ANNUAL REPORT PURSUANT TO SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2011
2014
Commission file number 333-08752
001-35934
Fomento Económico Mexicano, S.A.B. de C.V.
(Exact name of registrant as specified in its charter)
Mexican Economic Development, Inc.
(Translation of registrant’s name into English)
United Mexican States
(Jurisdiction of incorporation or organization)
General Anaya No. 601 Pte.
Colonia Bella Vista
Monterrey, NL 64410 Mexico
(Address of principal executive offices)
Juan F. Fonseca
General Anaya No. 601 Pte.
Colonia Bella Vista
Monterrey, NL 64410 Mexico
(52-818) 328-6167
investor@femsa.com.mx
(Name, telephone, e-mail and/or facsimile number and
address of company contact person)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Title of each class: | Name of each exchange on which registered: | |||
American Depositary Shares, each representing 10 BD Units, and each BD Unit consisting of one Series B Share, two Series D-B Shares and two Series D-L Shares, without par value | New York Stock Exchange | |||
2.875% Senior Notes due 2023 | New York Stock Exchange | |||
4.375% Senior Notes due 2043 | New York Stock Exchange |
Securities registered or to be registered pursuant to Section 12(g) of the Act:
None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
None
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report:
2,161,177,770 | BD Units, each consisting of one Series B Share, two Series D-B Shares and two Series D-L Shares, without par value. The BD Units represent a total of 2,161,177,770 Series B Shares, 4,322,355,540 Series D-B Shares and 4,322,355,540 Series D-L Shares. | |
1,417,048,500 | B Units, each consisting of five Series B Shares without par value. The B Units represent a total of 7,085,242,500 Series B Shares. |
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
x Yes | ¨ No |
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
¨ Yes | x No |
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). N/A
¨ Yes | ¨ No |
Indicate by check mark whether the registrant: (1) has filed all reports required to be file by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.
x Yes | ¨ No |
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated filer x | Accelerated filer ¨ | Non-accelerated filer ¨ |
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
U.S. GAAP ¨ | IFRS | Other |
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.
¨ Item 17 |
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
¨ Yes | x No |
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Insurance Policies | ||||||
Ownership by Management | ||||||
Board Practices |
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ITEM 16C. | PRINCIPAL ACCOUNTANT FEES AND SERVICES |
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ITEM 16D. | NOT APPLICABLE | |||||
ITEM 16E. | PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS | |||||
ITEM 16F. | NOT APPLICABLE | |||||
ITEM 16G. | CORPORATE GOVERNANCE | |||||
ITEM 16H. | NOT APPLICABLE | |||||
ITEM 17. | NOT APPLICABLE | |||||
ITEM 18. | FINANCIAL STATEMENTS | |||||
ITEM 19. | EXHIBITS |
iii-iii-
This annual report contains information materially consistent with the information presented in the audited consolidated financial statements and is free of material misstatements of fact that are not material inconsistencies with the information in the audited consolidated financial statements.
The terms “FEMSA,” “our company,” “we,” “us” and “our,” are used in this annual report to refer to Fomento Económico Mexicano, S.A.B. de C.V. and, except where the context otherwise requires, its subsidiaries on a consolidated basis. We refer to our subsidiary Coca-Cola FEMSA, S.A.B. de C.V., as “Coca-Cola FEMSA,” and our subsidiary FEMSA Comercio, S.A. de C.V., as “FEMSA Comercio.Comercio,” and our subsidiary CB Equity LLP, as “CB Equity.”
The term “S.A.B.” stands forsociedad anónima bursátil,, which is the term used in the United Mexican States, or Mexico, to denominate a publicly traded company under the Mexican Securities Market Law (Ley del Mercado de Valores), which we refer to as the Mexican Securities Law.
References to “U.S. dollars,” “US$,” “dollars” or “$” are to the lawful currency of the United States of America (which we refer to as the United States). References to “Mexican pesos,” “pesos” or “Ps.” are to the lawful currency of Mexico. References to “euros” or “€” are to the lawful currency of the European Economic and Monetary Union (which we refer to as the Euro Zone).
Currency Translations and Estimates
This annual report contains translations of certain Mexican peso amounts into U.S. dollars at specified rates solely for the convenience of the reader. These translations should not be construed as representations that the Mexican peso amounts actually represent such U.S. dollar amounts or could be converted into U.S. dollars at the rate indicated. Unless otherwise indicated, such U.S. dollar amounts have been translated from Mexican pesos at an exchange rate of Ps. 13.951014.7500 to US$ 1.00, the noon buying rate for Mexican pesos on December 30, 2011,31, 2014, as published by the U.S. Federal Reserve BankBoard in its H.10 Weekly Release of New York.Foreign Exchange Rates. On March 30, 2012,April 17, 2015, this exchange rate was Ps. 12.811515.3190 to US$ 1.00.See “Item 3. Key Information—Exchange Rate Information” for information regarding exchange rates since 2007.2010.
To the extent estimates are contained in this annual report, we believe that such estimates, which are based on internal data, are reliable. Amounts in this annual report are rounded, and the totals may therefore not precisely equal the sum of the numbers presented.
Per capita growth rates and population data have been computed based upon statistics prepared by theInstituto Nacional de Estadística, Geografía e Informáticaof Mexico (National Institute of Statistics, Geography and Information, which we refer to as INEGI), the Federal Reserve Bank of New York, the U.S. Federal Reserve Board andBanco de México (Bank of Mexico), local entities in each country and upon our estimates.
This annual report contains words, such as “believe,” “expect” and “anticipate” and similar expressions that identify forward-looking statements. Use of these words reflects our views about future events and financial performance. Actual results could differ materially from those projected in these forward-looking statements as a result of various factors that may be beyond our control, including but not limited to effects on our company from changes in our relationship with or among our affiliated companies, movements in the prices of raw materials, competition, significant developments in Mexico orand the other countries in which we operate, our ability to successfully integrate mergers and acquisitions we have completed in recent years, international economic or political conditions or changes in our regulatory environment. Accordingly, we caution readers not to place undue reliance on these forward-looking statements. In any event, these statements speak only as of their respective dates, and we undertake no obligation to update or revise any of them, whether as a result of new information, future events or otherwise.
Selected Consolidated Financial Data
This annual report includes under(under Item 18,18) our audited consolidated balance sheetsstatements of financial position as of December 31, 20112014 and 2010,2013, and the related consolidated income statements, consolidated statements of comprehensive income, changes in equity and cash flows and changes in stockholders’ equity for the years ended December 31, 2011, 20102014, 2013 and 2009.2012. Our audited consolidated financial statements are prepared in accordance with MexicanInternational Financial Reporting Standards (Normas de Información Financiera Mexicanas, which we refer to as Mexican FRS or NIF), which differ in certain significant respects from accounting principles generally accepted in the United States, or U.S. GAAP.
Notes 26 and 27 to our audited consolidated financial statements provide a description of the principal differences between Mexican FRS and U.S. GAAP as they relate to our company, together with a reconciliation to U.S. GAAP of net income, comprehensive income and stockholders’ equity as well as U.S. GAAP consolidated balance sheets, statements of income and comprehensive income and cash flows for the same periods presented for Mexican FRS purposes and for the consolidated statement of changes in stockholders’ equity for the years ended December 31, 2011 and 2010.
In the reconciliation to U.S. GAAP for the year ended December 31, 2009, we present our subsidiary Coca-Cola FEMSA, which is a consolidated subsidiary for purposes of Mexican FRS, under the equity method for U.S. GAAP purposes, due to the substantive participating rights of The Coca-Cola Company as a minority shareholder in Coca-Cola FEMSA during that year. On February 1, 2010, FEMSA and The Coca-Cola Company signed an amendment to their Shareholders’ Agreement. As a result of this amendment, FEMSA began to consolidate Cola-Cola FEMSA for U.S. GAAP purposes on this date. See Note 26A to our audited consolidated financial statements.
Beginning in 2012, Mexican issuers with securities registered in the National Securities Registry (Registro Nacional de Valores) of the Comisión Nacional Bancaria y de Valores (Mexican National Banking and Securities Commission, or the CNBV) are required to prepare financial statements in accordance with International Financial Reporting Standards(“IFRS”) as issued by the International Accounting Standards Board which we refer(“IASB”). Our date of transition to as IFRS. Accordingly, as ofIFRS was January 1, 2012, we are preparing our financial2011.
Pursuant to IFRS, the information presented in accordance with IFRS and will presentthis annual report presents financial information for 2014, 2013, 2012 and 2011 on a comparable basis. See Note 28 to our audited consolidated financial statements.
Beginning on January 1, 2008, in accordance with changes to NIF B-10 under Mexican FRS, we discontinued the use of inflation accounting for our subsidiaries that operate in “non-inflationary” countries where cumulative inflation for the three preceding years was less than 26%. Our subsidiaries in Mexico, Guatemala, Panama, Colombia and Brazil operate in non-inflationary economic environments, and therefore 2011, 2010 and 2009 figures reflect inflation effects only through 2007. Our subsidiaries in Nicaragua, Costa Rica, Venezuela and Argentina operate in economic environments in which cumulative inflation during the same three-year periods was greater than 26%, and we therefore continue recognizing inflationary accounting for 2011, 2010 and 2009. For comparison purposes, the figures prior to 2008 have been restatednominal terms in Mexican pesos, with purchasing power as of December 31, 2007, taking into account local inflation for each country with referenceof any hyperinflationary economic environment and converting from local currency to the consumer price index. Local currencies have been converted into Mexican pesos using the official exchange ratesrate at the end of the period published by the local central bank of each country. Our subsidiary in the Euro Zone, CB Equity LLP (which we refer tocountry categorized as CB Equity), operated in a non-inflationaryhyperinflationary economic environment (for this annual report, only Venezuela). Furthermore, for our Venezuelan entities we were able to convert local currency using one of the three legal exchange rates in 2011that country. For further information, see Notes 3.3 and 2010.3.4 to our audited consolidated financial statements. For each non-hyperinflationary economic environment, local currency is converted to Mexican pesos using the year-end exchange rate for assets and liabilities, the historical exchange rate for equity and the average exchange rate for the income statement. See Note 43.3 to our audited consolidated financial statements.
As a result of discontinuing inflationaryOur non-Mexican subsidiaries maintain their accounting for subsidiaries that operaterecords in non-inflationary economic environments, the currency and in accordance with accounting principles generally accepted in the country where they are located. For presentation in our consolidated financial statements, are no longer considered to bewe adjust these accounting records into IFRS and report in Mexican pesos under these standards.
Except when specifically indicated, information in this annual report on Form 20-F is presented in a reporting currency that comprehensively includes the effectsas of price level changes. Therefore, the inflationary effects of inflationary economic environments arising in 2009, 2010 and 2011 result in a difference that must be reconciled for U.S. GAAP purposes, except for Venezuela, which is considered to be a hyperinflationary environment since January 2010 and for which inflationary effects have not been reversed under U.S. GAAP. See Notes 26 and 27 to our audited consolidated financial statements.
On April 30, 2010, FEMSA announced the closing of the transaction pursuant to which FEMSA agreed to exchange 100% of its beer operations for a 20% economic interest in Heineken Holding N.V. and Heineken N.V., which, together with their respective subsidiaries, we refer to as Heineken or the Heineken Group. See “Item 4. Information on the Company—FEMSA Cerveza and Equity Method Investment in the Heineken Group.” Under Mexican FRS, we have reclassified our consolidated statements of income and cash flows for the year ended December 31, 20092014 and does not give effect to reflect Cuauhtémoc Moctezuma Holding, S.A. de C.V. (formerly FEMSA Cerveza, S.A. de C.V.), which we referany transaction, financial or otherwise, subsequent to as Cuauhtémoc Moctezuma or FEMSA Cerveza, as a discontinued operation. However, FEMSA Cerveza is not presented as a discontinued operation under U.S. GAAP. See “Item 5. Operating and Financial Review and Prospects—U.S. GAAP Reconciliation” and Notes 26 and 27 to our audited consolidated financial statements.that date.
The following table presents selected financial information of our company. This information should be read in conjunction with, and is qualified in its entirety by reference to, our audited consolidated financial statements, andincluding the notes to those statements. See “Item 18. Financial Statements.”thereto. The selected financial information contained herein is presented on a consolidated basis, and is not necessarily indicative of our financial position or results from operations at or for any future date or period. Under Mexican FRS, FEMSA Cerveza figures for years prior to 2010 have been reclassified and presented as discontinued operations for comparison purposes to 2011 and 2010 figures. Seeperiod; see Note 5B3 to our audited consolidated financial statements. Under U.S. GAAP, FEMSA Cerveza figures are presented as a continuing operation.statements for our significant accounting policies.
Selected Consolidated Financial Information Year Ended December 31, | ||||||||||||||||||||||||
2011(2) | 2011 | 2010 | 2009 | 2008 | 2007 | |||||||||||||||||||
(in millions of U.S. dollars and millions of Mexican pesos, except for percentages, per share data and weighted average number of shares outstanding) | ||||||||||||||||||||||||
Income Statement Data: | ||||||||||||||||||||||||
Mexican FRS:(1) | ||||||||||||||||||||||||
Total revenues | $ | 14,554 | Ps.203,044 | Ps.169,702 | Ps.160,251 | Ps.133,808 | Ps.114,459 | |||||||||||||||||
Income from operations(3) | 1,928 | 26,904 | 22,529 | 21,130 | 17,349 | 14,300 | ||||||||||||||||||
Income taxes(4) | 550 | 7,687 | 5,671 | 4,959 | 3,108 | 3,931 | ||||||||||||||||||
Consolidated net income before discontinued operations | 1,483 | 20,684 | 17,961 | 11,799 | 7,630 | 8,438 | ||||||||||||||||||
Income from the exchange of shares with Heineken, net of taxes | — | — | 26,623 | — | — | — | ||||||||||||||||||
Net income from discontinued operations | — | — | 706 | 3,283 | 1,648 | 3,498 | ||||||||||||||||||
Consolidated net income | 1,483 | 20,684 | 45,290 | 15,082 | 9,278 | 11,936 | ||||||||||||||||||
Net controlling interest income | 1,085 | 15,133 | 40,251 | 9,908 | 6,708 | 8,511 | ||||||||||||||||||
Net non-controlling interest income | 398 | 5,551 | 5,039 | 5,174 | 2,570 | 3,425 | ||||||||||||||||||
Net controlling interest income before discontinued operations: | ||||||||||||||||||||||||
Per Series B Share | 0.05 | 0.75 | 0.64 | 0.33 | 0.25 | 0.25 | ||||||||||||||||||
Per Series D Share | 0.07 | 0.94 | 0.81 | 0.42 | 0.32 | 0.32 | ||||||||||||||||||
Net controlling income from discontinued operations: | ||||||||||||||||||||||||
Per Series B Share | — | — | 1.37 | 0.16 | 0.08 | 0.17 | ||||||||||||||||||
Per Series D Share | — | — | 1.70 | 0.20 | 0.10 | 0.21 | ||||||||||||||||||
Net controlling interest income: | ||||||||||||||||||||||||
Per Series B Share | 0.05 | 0.75 | 2.01 | 0.49 | 0.33 | 0.42 | ||||||||||||||||||
Per Series D Share | 0.07 | 0.94 | 2.51 | 0.62 | 0.42 | 0.53 | ||||||||||||||||||
Weighted average number of shares outstanding (in millions): | ||||||||||||||||||||||||
Series B Shares | 9,246.4 | 9,246.4 | 9,246.4 | 9,246.4 | 9,246.4 | 9,246.4 | ||||||||||||||||||
Series D Shares | 8,644.7 | 8,644.7 | 8,644.7 | 8,644.7 | 8,644.7 | 8,644.7 | ||||||||||||||||||
Allocation of earnings: | ||||||||||||||||||||||||
Series B Shares | 46.11 | % | 46.11 | % | 46.11 | % | 46.11 | % | 46.11 | % | 46.11 | % | ||||||||||||
Series D Shares | 53.89 | % | 53.89 | % | 53.89 | % | 53.89 | % | 53.89 | % | 53.89 | % |
U.S. GAAP:(4) Total revenues Income from operations Participation in Coca-Cola FEMSA’s earnings(4) Consolidated net income Less: Net income attributable to the non-controlling interest income Net income attributable to controlling interest income Net controlling interest income: Per Series B Share Per Series D Share Weighted average number of shares outstanding (in millions): Series B Shares Series D Shares Balance Sheet Data: Mexican FRS:(1) Total assets of continuing operations Total assets of discontinued operations Current liabilities of continuing operations Current liabilities of discontinued operations Long-term debt of continuing operations(5) Other long-term liabilities of continuing operations Non-current liabilities of discontinued operations Capital stock Total stockholders’ equity Controlling interest Non-controlling interest U.S. GAAP:(4) Total assets Current liabilities Long-term debt(5) Other long-term liabilities Non-controlling interest Controlling interest Capital stock Stockholders’ equity(6) Other information: Mexican FRS:(1) Depreciation(7) Capital expenditures(8) Operating margin(9) U.S. GAAP: Depreciation(7) Operating margin(9) Income Statement Data: IFRS Total revenues Gross Profit Income before Income Taxes and Share of the Profit of Associates and Joint Ventures Accounted for Using the Equity Method Income taxes Consolidated net income Controlling interest net income Non-controlling interest net income Basic controlling interest net income: Per Series B Share Per Series D Share Diluted controlling interest net income: Per Series B Share Per Series D Share Weighted average number of shares outstanding (in millions): Series B Shares Series D Shares Allocation of earnings: Series B Shares Series D Shares Financial Position Data: IFRS Total assets Current liabilities Long-term debt(5) Other long-term liabilities Capital stock Total equity Controlling interest Non-controlling interest Other Information IFRS Depreciation Capital expenditures(6) Gross margin(7) Selected Consolidated Financial Information
Year Ended December 31, 2011(2) 2011 2010 2009 2008 2007 (in millions of U.S. dollars and millions of Mexican pesos, except for percentages, per
share data and weighted average number of shares outstanding) $ 14,640 Ps.204,242 Ps.177,053 Ps.102,902 Ps.91,650 Ps.83,362 1,810 25,252 21,235 8,661 7,881 7,667 — — 183 4,516 2,994 3,635 1,279 17,851 72,204 (10) 10,685 6,599 8,589 (387 ) (5,402 ) (4,759 ) (783 ) 253 (32 ) 892 12,449 67,445 9,902 6,852 8,557 0.04 0.62 3.36 0.49 0.34 0.43 0.06 0.78 4.20 0.62 0.43 0.53 9,246.4 9,246.4 9,246.4 9,246.4 9,246.4 9,246.4 8,644.7 8,644.7 8,644.7 8,644.7 8,644.7 8,644.7 $ 19,691 Ps.274,704 Ps.223,578 Ps.153,638 Ps.126,833 Ps.114,537 — — — 72,268 71,201 68,881 2,769 38,630 30,516 37,218 35,351 28,783 — — — 10,883 12,912 13,581 1,723 24,031 22,203 21,260 21,853 23,066 1,500 20,929 17,846 8,500 8,285 9,882 — — — 32,216 22,738 18,453 383 5,348 5,348 5,348 5,348 5,348 13,699 191,114 153,013 115,829 96,895 89,653 9,575 133,580 117,348 81,637 68,821 64,578 4,124 57,534 35,665 34,192 28,074 25,075 $ 27,956 Ps.390,016 Ps.334,517 Ps.158,000 Ps.139,219 Ps.127,167 2,772 38,676 30,629 23,539 23,654 18,579 1,722 24,031 21,927 24,119 19,557 16,569 3,164 44,148 39,825 10,900 9,966 8,715 7,205 100,517 78,495 1,274 505 698 13,092 182,644 163,641 98,168 85,537 82,606 383 5,348 5,348 5,348 5,348 5,348 20,297 283,161 242,136 99,442 86,042 83,304 $ 394 Ps.5,498 Ps.4,527 Ps.4,391 Ps.3,762 Ps.4,930 897 12,515 11,171 9,067 7,816 5,939 13.2 % 13.2 % 13.3 % 13.2 % 13.0 % 12.5 % $ 412 Ps.5,743 Ps.4,884 Ps.2,786 Ps.2,439 Ps.2,114 12.4 % 12.4 % 11.9 % 8.4 % 8.6 % 9.2 % Year Ended December 31, 2014(1) 2014(8) 2013(2) 2012(3) 2011(4) (in millions of Mexican pesos or millions of
U.S. dollars, except percentages and share and per share data) US$ 17,861 Ps. 263,449 Ps. 258,097 Ps. 238,309 Ps. 201,540 7,469 110,171 109,654 101,300 84,296 1,610 23,744 25,080 27,530 23,552 424 6,253 7,756 7,949 7,618 1,534 22,630 22,155 28,051 20,901 1,132 16,701 15,922 20,707 15,332 402 5,929 6,233 7,344 5,569 0.06 0.83 0.79 1.03 0.77 0.07 1.04 1.00 1.30 0.96 0.06 0.83 0.79 1.03 0.76 0.07 1.04 0.99 1.29 0.96 9,246.4 9,246.4 9,246.4 9,246.4 9,246.4 8,644.7 8,644.7 8,644.7 8,644.7 8,644.7 46.11 % 46.11 % 46.11 % 46.11 % 46.11 % 53.89 % 53.89 % 53.89 % 53.89 % 53.89 % US$ 25,503 Ps. 376,173 Ps. 359,192 Ps. 295,942 Ps. 263,362 3,343 49,319 48,869 48,516 39,325 5,623 82,935 72,921 28,640 23,819 936 13,797 14,852 8,625 8,047 227 3,347 3,346 3,346 3,345 15,601 230,122 222,550 210,161 192,171 11,557 170,473 159,392 155,259 144,222 4,044 59,649 63,158 54,902 47,949 US$ 612 Ps. 9,029 Ps. 8,805 Ps. 7,175 Ps. 5,694 1,231 18,163 17,882 15,560 12,666 42 % 42 % 42 % 43 % 42 %
We have not included selected consolidated financial data as of and for the year ended December 31, 2010, as we began presenting our financial statements in accordance with IFRS for the fiscal year ending December 31, 2012, with an official IFRS “adoption date” of January 1, 2012 and a |
prepare financial statements in accordance with IFRS as of and for the |
Translation to U.S. dollar amounts at an exchange rate of Ps. |
(2) | Includes results of Coca-Cola FEMSA Philippines, Inc., or CCFPI (formerly Coca-Cola Bottlers Philippines, Inc.), from February 2013 using the equity method, Grupo Yoli, S.A. de C.V. “Group Yoli” from June 2013, Companhia Fluminense de Refrigerantes from September 2013, Spaipa S.A. Industria Brasileira de Bebidas (“Spaipa”) from November 2013 and other business acquisitions. See“Item 4—Information on the Company—The Company—Corporate Background,” Note 10 and Note 4 to our audited consolidated financial statements. |
(3) |
(4) |
(5) | Includes long-term debt minus the current portion of long-term debt. |
(6) |
Includes investments in property, plant and equipment, intangible and other |
We have historically paid dividends per BD Unit (including in the form of American Depositary Shares, or ADSs) approximately equal to or greater than 1% of the market price on the date of declaration, subject to changes in our results from operations and financial position, including due to extraordinary economic events and to the factors described in “Item 3. Key Information—Risk Factors” that affect our financial condition and liquidity. These factors may affect whether or not dividends are declared and the amount of such dividends. We do not expect to be subject to any contractual restrictions on our ability to pay dividends, although our subsidiaries may be subject to such restrictions. Because we are a holding company with no significant operations of our own, we will have distributable profits and cash to pay dividends only to the extent that we receive dividends from our subsidiaries. Accordingly, we cannot assure you that we will pay dividends or as to the amount of any dividends.
The following table sets forth for each year the nominal amount of dividends per share that we declared in Mexican peso and U.S. dollar amounts and their respective payment dates for the 20072010 to 20112014 fiscal years:
Date Dividend Paid | Fiscal Year with Respect to which Dividend was Declared | Aggregate Amount of Dividend Declared | Per Series B Share Dividend | Per Series B Share Dividend | Per Series D Share Dividend | Per Series D Share Dividend | ||||||||||||||||
May 15, 2007 | 2006(1) | Ps.1,485,000,000 | Ps.0.0741 | $ | 0.0069 | Ps.0.0926 | $ | 0.0086 | ||||||||||||||
May 8, 2008 | 2007(1) | Ps.1,620,000,000 | Ps.0.0807 | $ | 0.0076 | Ps.0.1009 | $ | 0.0095 | ||||||||||||||
May 4, 2009 and November 3, 2009(2) | 2008 | Ps.1,620,000,000 | Ps.0.0807 | $ | 0.0061 | Ps.0.1009 | $ | 0.0076 | ||||||||||||||
May 4, 2009 | Ps.0.0404 | $ | 0.0030 | Ps.0.0505 | $ | 0.0038 | ||||||||||||||||
November 3, 2009 | Ps.0.0404 | $ | 0.0030 | Ps.0.0505 | $ | 0.0038 | ||||||||||||||||
May 4, 2010 and November 3, 2010(3) | 2009 | Ps.2,600,000,000 | Ps.0.1296 | $ | 0.0105 | Ps.0.1621 | $ | 0.0132 | ||||||||||||||
May 4, 2010 | Ps.0.0648 | $ | 0.0053 | Ps.0.0810 | $ | 0.0066 | ||||||||||||||||
November 3, 2010 | Ps.0.0648 | $ | 0.0053 | Ps.0.0810 | $ | 0.0066 | ||||||||||||||||
May 3, 2011 and November 2, 2011(4) | 2010 | Ps.4,600,000,000 | Ps.0.2294 | $ | 0.0199 | Ps.0.28675 | $ | 0.0249 | ||||||||||||||
May 3, 2011 | Ps.0.1147 | $ | 0.0099 | Ps.0.14338 | $ | 0.0124 | ||||||||||||||||
November 2, 2011 | Ps.0.1147 | $ | 0.0100 | Ps.0.14338 | $ | 0.0125 | ||||||||||||||||
May 3, 2012 and November 6, 2012(5) | 2011 | Ps.6,200,000,000 | Ps.0.3092 | N/a | (6) | Ps.0.3865 | N/a | |||||||||||||||
May 3, 2012 | Ps.0.1546 | N/a | Ps.0.1932 | N/a | ||||||||||||||||||
November 2, 2012 | Ps.0.1546 | N/a | Ps.0.1932 | N/a |
Date Dividend Paid | Fiscal Year with Respect to which Dividend was Declared | Aggregate Amount of Dividend Declared | Per Series B Share Dividend | Per Series B Share Dividend(7) | Per Series D Share Dividend | Per Series D Share Dividend(7) | ||||||||||||||||||
May 4, 2010 and November 3, 2010(1) | 2009 | Ps. 2,600,000,000 | Ps. 0.1296 | $ | 0.0105 | Ps. 0.1621 | $ | 0.0132 | ||||||||||||||||
May 4, 2010 | Ps. 0.0648 | $ | 0.0053 | Ps. 0.0810 | $ | 0.0066 | ||||||||||||||||||
November 3, 2010 | Ps. 0.0648 | $ | 0.0053 | Ps. 0.0810 | $ | 0.0066 | ||||||||||||||||||
May 4, 2011 and November 2, 2011(2) | 2010 | Ps. 4,600,000,000 | Ps. 0.2294 | $ | 0.0199 | Ps. 0.28675 | $ | 0.0249 | ||||||||||||||||
May 4, 2011 | Ps. 0.1147 | $ | 0.0099 | Ps. 0.14338 | $ | 0.0124 | ||||||||||||||||||
November 2, 2011 | Ps. 0.1147 | $ | 0.0085 | Ps. 0.14338 | $ | 0.0106 | ||||||||||||||||||
May 3, 2012 and November 6, 2012(3) | 2011 | Ps. 6,200,000,000 | Ps. 0.3092 | $ | 0.0231 | Ps. 0.3865 | $ | 0.0288 | ||||||||||||||||
May 3, 2012 | Ps. 0.1546 | $ | 0.0119 | Ps. 0.1932 | $ | 0.0149 | ||||||||||||||||||
November 6, 2012 | Ps. 0.1546 | $ | 0.0119 | Ps. 0.1932 | $ | 0.0149 | ||||||||||||||||||
May 7, 2013 and November 7, 2013(4) | 2012 | Ps. 6,684,103,000 | Ps. 0.3333 | $ | 0.0264 | Ps. 0.4166 | $ | 0.0330 | ||||||||||||||||
May 7, 2013 | Ps. 0.1666 | $ | 0.0138 | Ps. 0.2083 | $ | 0.0173 | ||||||||||||||||||
November 7, 2013 | Ps. 0.1666 | $ | 0.0126 | Ps. 0.2083 | $ | 0.0158 | ||||||||||||||||||
December 18, 2013(5) | 2012 | Ps. 6,684,103,000 | Ps. 0.3333 | $ | 0.0257 | Ps. 0.4166 | $ | 0.0321 | ||||||||||||||||
May 7, 2015 and November 5, 2015(6) | 2014 | Ps. 7,350,000,000 | Ps. 0.3665 | $ | N/A | Ps. 0.4581 | $ | N/A | ||||||||||||||||
May 7, 2015 | Ps. 0.1833 | $ | N/A | Ps. 0.2291 | $ | N/A | ||||||||||||||||||
November 5, 2015 | Ps. 0.1833 | $ | N/A | Ps. 0.2291 | $ | N/A |
(1) |
The dividend payment for 2009 was divided into two equal |
The dividend payment for 2010 was divided into two equal |
The dividend payment for 2011 was divided into two equal |
The |
(5) | The dividend payment declared in December 2013 was payable on December 18, 2013 with a record date of December 17, 2013. |
(6) | The dividend payment for 2014 will be divided into two equal payments. The first payment will become payable on May 7, 2015 with a record date of May 6, 2015, and the second payment will become payable on November 5, 2015 with a record date of November 4, 2015. The dividend payment for 2014 will be derived from the balance of the |
(7) | Translations to U.S. dollars are based on the exchange |
At the annual ordinary general shareholders meeting, or AGM, the board of directors submits the financial statements of our company for the previous fiscal year, together with a report thereon by the board of directors. Once the holders of Series B Shares have approved the financial statements, they determine the allocation of our net profits for the preceding year. Mexican law requires the allocation of at least 5% of net profits to a legal reserve, which is not subsequently available for distribution, until the amount of the legal reserve equals 20% of our paid in capital stock. As of the date of this report, the legal reserve of our company is fully constituted. Thereafter, the holders of Series B Shares may determine and allocate a certain percentage of net profits to any general or special reserve, including a reserve for open-market purchases of our shares. The remainder of net profits is available for distribution in the form of dividends to our shareholders. Dividends may only be paid if net profits are sufficient to offset losses from prior fiscal years.
Our bylaws provide that dividends will be allocated among the shares outstanding and fully paid shares at the time a dividend is declared in such manner that each Series D-B Share and Series D-L Share receives 125% of the dividend distributed in respect of each Series B Share. Holders of Series D-B Shares and Series D-L Shares are entitled to this dividend premium in connection with all dividends paid by us other than payments in connection with the liquidation of our company.
Subject to certain exceptions contained in the deposit agreement dated May 11, 2007, among FEMSA, The Bank of New York Mellon (formerly The Bank of New York), as ADS depositary, and holders and beneficial owners from time to time of our ADSs, evidenced by American Depositary Receipts, or ADRs, any dividends distributed to holders of our ADSs will be paid to the ADS depositary in Mexican pesos and will be converted by the ADS depositary into U.S. dollars. As a result, restrictions on conversion of Mexican pesos into foreign currencies and exchange rate fluctuations may affect the ability of holders of our ADSs to receive U.S. dollars, and exchange rate fluctuations may affect the U.S. dollar amount actually received by holders of our ADSs.
The following table sets forth, for the periods indicated, the high, low, average and year-end noon buying exchange rate, published by the Federal Reserve Bank of New York for cable transfers ofexpressed in Mexican pesos per U.S. dollar. The Federal Reserve Bank of New York discontinued the publication of foreign exchange rates on December 31, 2008, and therefore, the data provided for the periods beginning January 1, 2009 are based on the ratesdollar, as published by the U.S. Federal Reserve Board in its H.10 Weekly Release of Foreign Exchange Rates. The rates have not been restated in constant currency units and therefore represent nominal historical figures.
Year ended December 31, | Exchange Rate | Exchange Rate | ||||||||||||||||||||||||||||||
High | Low | Average(1) | Year End | High | Low | Average(1) | Year End | |||||||||||||||||||||||||
2007 | 11.27 | 10.67 | 10.93 | 10.92 | ||||||||||||||||||||||||||||
2008 | 13.94 | 9.92 | 11.21 | 13.83 | ||||||||||||||||||||||||||||
2009 | 15.41 | 12.63 | 13.50 | 13.06 | ||||||||||||||||||||||||||||
2010 | 13.19 | 12.16 | 12.64 | 12.38 | 13.19 | 12.16 | 12.64 | 12.38 | ||||||||||||||||||||||||
2011 | 14.25 | 11.51 | 12.46 | 13.95 | 14.25 | 11.51 | 12.46 | 13.95 | ||||||||||||||||||||||||
2012 | 14.37 | 12.63 | 13.14 | 12.96 | ||||||||||||||||||||||||||||
2013 | 13.43 | 11.98 | 12.86 | 13.10 | ||||||||||||||||||||||||||||
2014 | 14.79 | 12.84 | 13.37 | 14.75 |
(1) | Average month-end rates. |
Exchange Rate | Exchange Rate | |||||||||||||||||||||||
High | Low | Period End | High | Low | Period End | |||||||||||||||||||
2010: | ||||||||||||||||||||||||
2013: | ||||||||||||||||||||||||
First Quarter | Ps.13.19 | Ps.12.30 | Ps.12.30 | Ps.12.88 | Ps.12.32 | Ps.12.32 | ||||||||||||||||||
Second Quarter | 13.14 | 12.16 | 12.83 | 13.41 | 11.98 | 12.99 | ||||||||||||||||||
Third Quarter | 13.17 | 12.49 | 12.63 | 13.43 | 12.50 | 13.16 | ||||||||||||||||||
Fourth Quarter | 12.61 | 12.21 | 12.38 | 13.25 | 12.77 | 13.10 | ||||||||||||||||||
2011: | ||||||||||||||||||||||||
2014: | ||||||||||||||||||||||||
First Quarter | 12.25 | 11.92 | 11.92 | Ps.13.51 | Ps.13.00 | Ps.13.06 | ||||||||||||||||||
Second Quarter | 11.97 | 11.51 | 11.72 | 13.14 | 12.85 | 12.97 | ||||||||||||||||||
Third Quarter | 13.87 | 11.57 | 13.77 | 13.48 | 12.93 | 13.43 | ||||||||||||||||||
Fourth Quarter | 14.25 | 13.10 | 13.95 | 14.79 | 13.39 | 14.75 | ||||||||||||||||||
2012: | ||||||||||||||||||||||||
October | 13.57 | 13.39 | 13.48 | |||||||||||||||||||||
November | 13.92 | 13.54 | �� | 13.92 | ||||||||||||||||||||
December | 14.79 | 13.94 | 14.75 | |||||||||||||||||||||
2015: | ||||||||||||||||||||||||
January | 13.75 | 12.93 | 13.04 | Ps.15.01 | Ps.14.56 | Ps.15.01 | ||||||||||||||||||
February | 12.95 | 12.63 | 12.79 | 15.10 | 14.75 | 14.94 | ||||||||||||||||||
March | 12.99 | 12.63 | 12.81 | 15.58 | 14.93 | 15.25 | ||||||||||||||||||
First Quarter | 13.75 | 12.63 | 12.81 | 15.58 | 14.56 | 15.25 |
Risks Related to Our Company
Coca-Cola FEMSA
Coca-Cola FEMSA’s business depends on its relationship with The Coca-Cola Company, and changes in this relationship may adversely affect its results from operations and financial condition.
Substantially all of Coca-Cola FEMSA’s sales are derived from sales ofCoca-Colatrademark beverages. Coca-Cola FEMSA produces, markets, sells and distributesCoca-Colatrademark beverages through standard bottler agreements in certain territories in Mexico and Latin America,the countries in which we refer to Coca-Cola FEMSA’s “territories.”it operates. See “Item 4. Information on the Company—Coca-Cola FEMSA—Coca-Cola FEMSA’s Territories.” Through its rights under Coca-Cola FEMSA’s bottler agreements and as a large shareholder, The Coca-Cola Company has the right to participate in the process for making importantcertain decisions related to Coca-Cola FEMSA’s business.
The Coca-Cola Company may unilaterally set the price for its concentrate. In addition, under Coca-Cola FEMSA’s bottler agreements, it is prohibited from bottling or distributing any other beverages without The Coca-Cola Company’s authorization or consent, and it may not transfer control of the bottler rights of any of its territories without prior consent offrom The Coca-Cola Company.
The Coca-Cola Company also makes significant contributions to Coca-Cola FEMSA’s marketing expenses, although it is not required to contribute a particular amount. Accordingly, The Coca-Cola Company may discontinue or reduce such contributions at any time.
Coca-Cola FEMSA depends on The Coca-Cola Company to renewcontinue with its bottler agreements. As of December 31, 2011, Coca-Cola FEMSA had seven bottler agreements in Mexico, with each one corresponding to a different territory as follows: (i) the agreements for Mexico’s Valley territory expire in June 2013 and April 2016; (ii) the agreements for the Central territory expire in May 2015 and July 2016; (iii) the agreement for the Northeast territory expires in September 2014; (iv) the agreement for the Bajio territory expires in May 2015; and (v) the agreement for the Southeast territory expires in June 2013. Coca-Cola FEMSA’s bottler agreements with The Coca-Cola Company will expire for Coca-Cola FEMSA’s territories in other countries as follows: Argentina in September 2014; Brazil in April 2014; Colombia in June 2014; Venezuela in August 2016; Guatemala in March 2015; Costa Rica in September 2017; Nicaragua in May 2016; and Panama in November 2014. All of Coca-Cola FEMSA’s bottler agreements are automatically renewable for ten-year terms, subject to the right of either party thereto to give prior notice that it does not wish to renew the relevantapplicable agreement. In addition, these agreements generally may be terminated in the case of material breach.See “Item 10. Additional Information—Material Contracts—Material Contracts Relating to Coca-Cola FEMSA—Bottler Agreements.” Termination would prevent Coca-Cola FEMSA from sellingCoca-Cola trademark beverages in the affected territory and would have an adverse effect on Coca-Cola FEMSA’s business, financial condition, results from operations and prospects.
The Coca-Cola Company has substantial influence on the conduct of Coca-Cola FEMSA’s business, which may result in Coca-Cola FEMSA taking actions contrary to the interests of its remaining shareholders.
The Coca-Cola Company has substantial influence on the conduct of Coca-Cola FEMSA’s business. As of April 20, 2012,17, 2015, The Coca-Cola Company indirectly owned 29.4%28.1% of Coca-Cola FEMSA’s outstanding capital stock, representing 37.0% of its capital stockCoca-Cola FEMSA’s shares with full voting rights. The Coca-Cola Company is entitled to appoint five of Coca-Cola FEMSA’s maximum of 21 directors and the vote of at least two of them is required to approve certain actions by Coca-Cola FEMSA’s board of directors. As of April 17, 2015, we indirectly owned 47.9% of Coca-Cola FEMSA’s outstanding capital stock, representing 63.0% of Coca-Cola FEMSA’s capital stock with full voting rights. We are entitled to appoint 13 of Coca-Cola FEMSA’s maximum of 21 directors and all of its executive officers. On February 1, 2010, weWe and The Coca-Cola Company signed a second amendment to the shareholders agreement that confirms our power to govern Coca-Cola FEMSA’s operating and financial policiestogether, or only we in order to exercise control over its operations in the ordinary course of business. The Coca-Cola Company hascertain circumstances, have the power to determine the outcome of certain protective rights, such as mergers, acquisitions orall actions requiring the saleapproval of any line of business, requiring approval by itsCoca-Cola FEMSA’s board of directors, and maywe and The Coca-Cola Company together, or only we in certain circumstances, have the power
to determine the outcome of certainall actions requiring the approval of Coca-Cola FEMSA’s shareholders.See “Item 10. Additional Information—Material Contracts—Material Contracts Relating to Coca-Cola FEMSA.FEMSA—Shareholders Agreement.” The interests of The Coca-Cola Company may be different from the interests of Coca-Cola FEMSA’s remaining shareholders, which may result in Coca-Cola FEMSA taking actions contrary to the interests of its remaining shareholders.
Changes in consumer preference and public concern about health related issues could reduce demand for some of Coca-Cola FEMSA has significant transactions with affiliates, particularly The Coca-Cola Company, which may create the potential for conflicts of interest and could result in less favorable terms to Coca-Cola FEMSA.FEMSA’s products.
The non-alcoholic beverage industry is evolving as a result of, among other things, changes in consumer preferences and regulatory actions. There have been different plans and actions adopted in recent years by governmental authorities in some of the countries where Coca-Cola FEMSA engagesoperates that have resulted in several transactionsincreased taxes or the imposition of new taxes on the sale of beverages containing certain sweeteners, and other regulatory measures, such as restrictions on advertising for some of Coca-Cola FEMSA’s products. Moreover, researchers, health advocates and dietary guidelines are encouraging consumers to reduce their consumption of certain types of beverages sweetened with subsidiaries of The Coca-Cola Company.sugar and High Fructose Corn Syrup, or HFCS. In addition, concerns over the environmental impact of plastic may reduce the consumption of Coca-Cola FEMSA has entered into cooperative marketing arrangements with TheFEMSA’s products sold in plastic bottles or result in additional taxes that would adversely affect consumer demand. Increasing public concern about these issues, possible new or increased taxes, regulatory measures and governmental regulations could reduce demand for some of Coca-Cola Company and is a party to a number of bottler agreements with The Coca-Cola Company. Coca-Cola FEMSA also has agreed to develop still beverages and waters inFEMSA’s products which would adversely affect its territories with The Coca-Cola Company and has entered into agreements to acquire companies with The Coca-Cola Company. See “Item 7. Major Shareholders and Related Party Transactions—Related Party Transactions—Business Transactions between Coca-Cola FEMSA and The Coca-Cola Company.”
Coca-Cola FEMSA could engage in transactions on less favorable terms with related parties, due to potential conflicts of interest, compared to terms that could be obtained with an unaffiliated third party.results.
Competition could adversely affect Coca-Cola FEMSA’s financial performance.
The beverage industry in the territories in which Coca-Cola FEMSA operates is highly competitive. Coca-Cola FEMSA faces competition from other bottlers of sparkling beverages, such asPepsi products, and from producers of low cost beverages or “B brands.” Coca-Cola FEMSA also competes in different beverage categories other than sparkling beverages, such as water, juice-based beverages, teas, sport drinks and value-added dairy products. Although competitive conditions are different in each of its territories, Coca-Cola FEMSA’s territories, itFEMSA competes principally in terms of price, packaging, consumer sales promotions, customer service and product innovation.See “Item 4. Information on the Company—Coca-Cola FEMSA—Competition.” There can be no assurances that Coca-Cola FEMSA will be able to avoid lower pricing as a result of competitive pressure. Lower pricing, changes made in response to competition and changes in consumer preferences may have an adverse effect on Coca-Cola FEMSA’s financial performance.
Changes in consumer preference could reduce demand for some of Coca-Cola FEMSA’s products.
The non-alcoholic beverage industry is rapidly evolving as a result of, among other things, changes in consumer preferences. Specifically, consumers are becoming increasingly aware of and concerned about environmental and health issues. Concerns over the environmental impact of plastic may reduce the consumption of Coca-Cola FEMSA’s products sold in plastic bottles or result in additional taxes that would adversely affect consumer demand. In addition, researchers, health advocates and dietary guidelines are encouraging consumers to reduce their consumption of certain types of beverages sweetened with sugar and high fructose corn syrup (or HFCS), which could reduce demand for certain of Coca-Cola FEMSA’s products. A reduction in consumer demand would adversely affect Coca-Cola FEMSA’s results from operations.
Water shortages or any failure to maintain existing concessions could adversely affect Coca-Cola FEMSA’s business.
Water is an essential component of all of Coca-Cola FEMSA’s products. Coca-Cola FEMSA obtains water from various sources in its territories, including springs, wells, rivers and municipal and state water companies pursuant to either contracts to obtain water or pursuant to concessions granted by governments in its various territories.territories or pursuant to contracts.
Coca-Cola FEMSA obtains the vast majority of the water used in its production from municipal utility companies and pursuant to concessions to exploituse wells, which are generally granted based on studies of the existing and projected groundwater supply. Coca-Cola FEMSA’s existing water concessions or contracts to obtain water may be terminated by governmental
authorities under certain circumstances and their renewal depends on receiving necessary authorizations from local and/or federal water authorities.See “Item 4. Information on the Company—Regulatory Matters—Water Supply Law.Supply.” In some of Coca-Cola FEMSA’sits other territories, theCoca-Cola FEMSA’s existing water supply may not be sufficient to meet Coca-Cola FEMSA’sits future production needs, and the available water supply may be adversely affected by shortages or changes in governmental regulations and environmental changes.
Water supply in the São Paulo region has been recently affected by low rainfall, which has affected the main water reservoir that serves the greater São Paulo area (Cantareira). Although Coca-Cola FEMSA’s Jundiaí plant does not obtain water from this water reservoir, water shortages or changes in governmental regulations aimed at rationalizing water in the region could affect Coca-Cola FEMSA’s water supply in its Jundiaí plant.
We cannot assure you that water will be available in sufficient quantities to meet Coca-Cola FEMSA’s future production needs or will prove sufficient to meet Coca-Cola FEMSA’sits water supply needs.
Increases in the prices of raw materials would increase Coca-Cola FEMSA’s cost of goods sold and may adversely affect Coca-Cola FEMSA’s results from operations.its results.
In addition to water, Coca-Cola FEMSA’s most significant raw materials are (1) concentrate, which it acquires from affiliates of The Coca-Cola Company, (2) packaging materialssweeteners and (3) sweeteners.packaging materials. Prices for sparklingCoca-Cola trademark beverages concentrate are determined by The Coca-Cola Company as a percentage of the weighted average retail price in local currency, net of applicable taxes. In 2005, The Coca-Cola Company decided to gradually increasehas unilaterally increased concentrate prices in the past and may do so again in the future. We cannot assure you that The Coca-Cola Company will not increase the price of the concentrate for sparklingCoca-Cola trademark beverages or change the manner in Brazil and Mexico. These increases were fully implementedwhich such price will be calculated in Brazil in 2008 and in Mexico in 2009. However,the future. Coca-Cola FEMSA may experience further increasesnot be successful in its territoriesnegotiating or implementing measures to mitigate the negative effect this may have in the future.pricing of its products or its results. The prices for Coca-Cola FEMSA’s remaining raw materials are driven by market prices and local availability, as well as the imposition of import duties and import restrictions and fluctuations in exchange rates. Coca-Cola FEMSA is also required to meet all of its supply needs from suppliers approved by The Coca-Cola Company, which may limit the number of suppliers available to it. Coca-Cola FEMSA’s sales prices are denominated in the local currency in each country in which it operates, while the prices of certain materials, including those used in the bottling of its products, mainly resin, ingotspreforms to make plastic bottles, finished plastic bottles, aluminum cans and HFCS, are paid in or determined with reference to the U.S. dollar, and therefore may increase if the U.S. dollar appreciates against the currenciescurrency of the countries in which Coca-Cola FEMSA operates, as was the case in 2008 and 2009. Whileoperates. We cannot anticipate whether the U.S. dollar did notwill appreciate against the currency of any of the countries in which Coca-Cola FEMSA operates in 2010 or most of 2011, we cannot assure you that an appreciation of the U.S. dollardepreciate with respect to such currencies will not occur in the future.Seefuture.See “Item 4. Information on the Company—Coca-Cola FEMSA—Raw Materials.”
Coca-Cola FEMSA’s most significant packaging raw material costs arise from the purchase of resin and plastic ingotspreforms to make plastic bottles and from the purchase of finished plastic bottles, the prices of which are tiedrelated to crude oil prices and global resin supply. The average prices that Coca-Cola FEMSA paid for resin and plastic ingotspreforms in U.S. dollars increased significantly in 2011,2014, as compared to 2010.2013 were lower in Mexico, Central America, Colombia and Argentina, remained flat in Venezuela and were higher in Brazil. We cannot provide any assuranceassure you that prices will not increase further in future periods. AverageDuring 2014, average sweetener prices including of sugarin Mexico, Brazil and HFCS, paid by Coca-Cola FEMSA during 2011Argentina were higherlower as compared to 2013, remained flat in Colombia and Nicaragua and were higher in Venezuela, Costa Rica and Panama. From 2010 in all of the countries in which it operates. During the 2009-2011 period,through 2014, international sugar prices were volatile due to various factors, including shifting demands, availability and climate issues affecting production and distribution. In all of the countries in which Coca-Cola FEMSA operates, other than Brazil, sugar prices are subject to local regulations and other barriers to market entry that cause Coca-Cola FEMSA to pay in excess of international market prices.See “Item 4. Information on the Company—Coca-Cola FEMSA—Raw Materials.” We cannot assure you that Coca-Cola FEMSA’s raw material prices will not further increase in the future. Increases in the prices of raw materials would increase Coca-Cola FEMSA’s cost of goods sold and adversely affect its financial performance.
Taxes could adversely affect Coca-Cola FEMSA’s business.
The countries in which Coca-Cola FEMSA operates may adopt new tax laws or modify existing tax laws to increase taxes applicable to Coca-Cola FEMSA’s business or products. Coca-Cola FEMSA’s products are subject to certain taxes in many of the countries in which it operates, such as certain countries in Central America, Mexico, Brazil, Venezuela and Argentina, which impose taxes on sparkling beverages.See “Item 4. Information on the Company—Regulatory Matters—Taxation of Beverages.”The imposition of new taxes or increases in existing taxes, or changes in the interpretation of tax laws and regulation by tax authorities, may have a material adverse effect on Coca-Cola FEMSA’s business, financial condition, prospects and results.
Tax legislation in some of the countries in which Coca-Cola FEMSA operates have recently been subject to major changes.See “Item 4. Information on the Company—Regulatory Matters—Mexican Tax Reform”and Item 4. Information on the Company—Regulatory Matters—Other Recent Tax Reforms.”We cannot assure you that these reforms or other reforms adopted by governments in the countries in which Coca-Cola FEMSA operates will not have a material adverse effect on its business, financial condition and results of operation.
Regulatory developments may adversely affect Coca-Cola FEMSA’s business.
Coca-Cola FEMSA is subject to regulation in each of the territories in which it operates. The principal areas in which Coca-Cola FEMSA is subject to regulation are water, environment, labor, taxation, health and antitrust. Regulation can also affect Coca-Cola FEMSA’s ability to set prices for its products.See “Item 4. Information on the Company—Regulatory Matters.” The adoption of new laws or regulations or a stricter interpretation or enforcement thereof in the countries in which Coca-Cola FEMSA operates may increase its operating costs or impose restrictions on its operations which, in turn, may adversely affect Coca-Cola FEMSA’s financial condition, business and results. In particular, environmental standards are becoming more stringent in several of the countries in which Coca-Cola FEMSA operates, and Coca-Cola FEMSA is in the process of complying with these standards; however we cannot assure you that in any event Coca-Cola FEMSA will be able to meet any timelines for compliance established by the relevant regulatory authorities.See “Item 4. Information on the Company—Regulatory Matters—Environmental Matters.” Further changes in current regulations may result in an increase in compliance costs, which may have an adverse effect on Coca-Cola FEMSA’s future results or financial condition.
Voluntary price restraints or statutory price controls have been imposed historically in several of the countries in which Coca-Cola FEMSA operates. Currently, there are no price controls on Coca-Cola FEMSA’s products in any of the territories in which it has operations, except for those in Argentina, where authorities directly supervise five of Coca-Cola FEMSA’s products sold through supermarkets as a measure to control inflation, and Venezuela, where the government has imposed price controls on certain of Coca-Cola FEMSA’s products, including bottled water, and has recently imposed a limit on profits earned on the sale of goods, including Coca-Cola FEMSA’s products, seeking to maintain price stability of, and equal access to, goods and services. If Coca-Cola FEMSA exceeds such limit on profits, it may be forced to reduce the prices of its products in Venezuela, which would in turn adversely affect its business and results of operations. In addition, consumer protection laws in Venezuela are subject to continuing review and changes, and any such changes may have an adverse impact on Coca-Cola FEMSA. We cannot assure you that existing or future regulations in Venezuela relating to goods and services will not result in increased limits on profits or a forced reduction of prices affecting Coca-Cola FEMSA’s products, which could have a negative effect on its results of operations. The imposition of these restrictions or voluntary price restraints in other territories may have an adverse effect on Coca-Cola FEMSA’s results and financial position.See “Item 4. Information on the Company—Regulatory Matters—Price Controls.” We cannot assure you that governmental authorities in any country where Coca-Cola FEMSA operates will not impose statutory price controls or that Coca-Cola FEMSA will not need to implement voluntary price restraints in the future.
Unfavorable results of legal proceedings could have an adverse effect on Coca-Cola FEMSA’s results or financial condition.
Coca-Cola FEMSA’s operations have from time to time been and may continue to be subject to investigations and proceedings by antitrust authorities, and litigation relating to alleged anticompetitive practices. Coca-Cola FEMSA has also been subject to investigations and proceedings on environmental and labor matters. We cannot assure you that these investigations and proceedings will not have an adverse effect on Coca-Cola FEMSA’s results or financial condition.See “Item 8. Financial Information—Legal Proceedings.”
Weather conditions may adversely affect Coca-Cola FEMSA’s results.
Lower temperatures, higher rainfall and other adverse weather conditions such as typhoons and hurricanes may negatively impact consumer patterns, which may result in lower per capita consumption of Coca-Cola FEMSA’s beverage offerings. Additionally, such adverse weather conditions may affect road infrastructure and points of sale in the territories in which Coca-Cola FEMSA operates and limit Coca-Cola FEMSA’s ability to sell and distribute its products, thus affecting its results.
Coca-Cola FEMSA may not be able to successfully integrate its recent acquisitions and achieve the operational efficiencies and/or expected synergies.
Coca-Cola FEMSA has and may continue to acquire bottling operations and other businesses. A key element to achieve the benefits and expected synergies of Coca-Cola FEMSA’s recent and future acquisitions and/or mergers is to integrate the operation of acquired or merged businesses into its operations in a timely and effective manner. Coca-Cola FEMSA may incur unforeseen liabilities in connection with acquiring, taking control of, or managing bottling operations and other businesses and may encounter difficulties and unforeseen or additional costs in restructuring and integrating them into its operating structure. We cannot assure you that these efforts will be successful or completed as expected by Coca-Cola FEMSA, and Coca-Cola FEMSA’s business, results and financial condition could be adversely affected if it is unable to do so.
Political and social events in the countries in which Coca-Cola FEMSA operates may significantly affect its operations.
Political and social events in the countries in which Coca-Cola FEMSA operates, as well as changes in governmental policies may have an adverse effect on Coca-Cola FEMSA’s business, results of operations and financial condition. In recent years, some of the governments in the countries in which Coca-Cola FEMSA operates have implemented and may continue to implement significant changes in laws, public policy and/or regulations that could affect the political and social conditions in these countries. Any such changes may have an adverse effect on Coca-Cola FEMSA’s business, results of operations and financial condition. We cannot assure you that political or social developments in any of the countries in which Coca-Cola FEMSA operates, such as the election of new administrations, political disagreements, civil disturbances and the rise in violence and perception of violence, over which Coca-Cola FEMSA has no control, will not have a corresponding adverse effect on the local or global markets or on Coca-Cola FEMSA’s business, results of operations and financial condition.
FEMSA Comercio
Competition from other retailers in Mexico could adversely affect FEMSA Comercio’s business.
The Mexican retail sector is highly competitive. FEMSA participates in the retail sector primarily through FEMSA Comercio. FEMSA Comercio’s OXXO stores face competition from small-format stores like 7-Eleven, Extra, Super City, Círculo K stores and other numerous chains of retailers across Mexico, from other regional small-format retailers to small informal neighborhood stores. In particular, small informal neighborhood stores can sometimes avoid regulatory oversight and taxation, enabling them to sell certain products at below market prices. In addition, these small informal neighborhood stores could improve their technological capabilities so as to enable credit card transactions and electronic payment of utility bills, which would diminish FEMSA Comercio’s competitive advantage. FEMSA Comercio may face additional competition from new market entrants. Increased competition may limit the number of new locations available to FEMSA Comercio and require FEMSA Comercio to modify its product offering or pricing. In addition, consumers may prefer alternative products or store formats offered by competitors. As a result, FEMSA Comercio’s results and financial position may be adversely affected by competition in the future.
Sales of OXXO small-format stores may be adversely affected by changes in economic conditions in Mexico.
Small-format stores often sell certain products at a premium. The small-format store market is thus highly sensitive to economic conditions, since an economic slowdown is often accompanied by a decline in consumer purchasing power, which in turn results in a decline in the overall consumption of FEMSA Comercio’s main product categories. During periods of economic slowdown, OXXO stores may experience a decline in traffic per store and purchases per customer, and this may result in a decline in FEMSA Comercio’s results.
Regulatory changes may adversely affect FEMSA Comercio’s business.
In Mexico, FEMSA Comercio is subject to regulation in areas such as labor, taxation and local permits. The adoption of new laws or regulations, or a stricter interpretation or enforcement of existing laws and regulations, may increase operating costs or impose restrictions on FEMSA Comercio’s operations which, in turn, may adversely affect FEMSA Comercio’s financial condition, business and results. Further changes in current regulations may negatively impact traffic, revenues, operational costs and commercial practices, which may have an adverse effect on FEMSA Comercio’s future results or financial condition.
Taxes could adversely affect FEMSA Comercio’s business.
Mexico, where FEMSA Comercio primarily operates, may adopt new tax laws or modify existing laws to increase taxes applicable to FEMSA Comercio’s business or products. The imposition of new taxes or increases in existing taxes, or changes in the interpretation of tax laws and regulation by tax authorities, may have a material adverse effect on FEMSA Comercio’s business, financial condition, prospects and results.See “Item 4. Information on the Company—Regulatory Matters—Mexican Tax Reform.”
FEMSA Comercio may not be able to maintain its historic growth rate.
FEMSA Comercio increased the number of OXXO stores at a compound annual growth rate of 11.1% from 2010 to 2014. The growth in the number of OXXO stores has driven growth in total revenue and results at FEMSA Comercio over the same period. As the overall number of stores increases, percentage growth in the number of OXXO stores is likely to decrease. In addition, as small-format store penetration in Mexico grows, the number of viable new store locations may decrease, and new store locations may be less favorable in terms of same-store sales, average ticket and store traffic. As a result, FEMSA Comercio’s future results and financial condition may not be consistent with prior periods and may be characterized by lower growth rates in terms of total revenue and results. In Colombia, FEMSA Comercio may not be able to maintain similar historic growth rates to those in Mexico.
FEMSA Comercio’s business depends heavily on information technology.
FEMSA Comercio invests aggressively in information technology (which we refer to as IT) in order to maximize its value generation potential. Given the rapid speed at which FEMSA Comercio adds new services and products to its commercial offerings, the development of IT systems, hardware and software needs to keep pace with the growth of the business. If these systems became obsolete or if planning for future IT investments were inadequate, it could affect FEMSA Comercio’s business by reducing the flexibility of its value proposition to consumers or by increasing its operating complexity, either of which could adversely affect FEMSA Comercio’s revenue-per-store trends.
FEMSA Comercio’s business could be adversely affected by a failure, interruption, or breach of our IT system.
FEMSA Comercio’s business relies heavily on its advanced IT system to effectively manage its data, communications, connectivity, and other business processes. Although we constantly improve our IT system and protect it with advanced security measures, it may still be subject to defects, interruptions, or security breaches such as viruses or data theft. Such a defect, interruption, or breach could adversely affect FEMSA Comercio’s results or financial position.
FEMSA Comercio’s business may be adversely affected by an increase in the price of electricity.
The performance of FEMSA Comercio’s stores would be adversely affected by increases in the price of utilities on which the stores depend, such as electricity. Although the price of electricity in Mexico has remained stable recently, it could potentially increase as a result of inflation, shortages, interruptions in supply, or other reasons, and such an increase could adversely affect our results or financial position.
FEMSA Comercio’s business acquisitions may lead to decreased profit margins.
FEMSA Comercio has recently entered into new markets through the acquisition of other small-format retail businesses. FEMSA Comercio continued with this strategy in 2014 and may continue it into the future. These new businesses are currently less profitable than OXXO, and might therefore marginally dilute FEMSA Comercio’s margins in the short to medium term.
Risks Related to Our Holding of Heineken N.V. and Heineken Holding N.V. Shares
FEMSA does not control Heineken N.V.’s and Heineken Holding N.V.’s decisions.
On April 30, 2010, FEMSA announced the closing of the transaction pursuant to which FEMSA agreed to exchange 100% of its beer operations for a 20% economic interest in Heineken N.V. and Heineken Holding N.V. (which, together with their respective subsidiaries, we refer to as Heineken or the Heineken Group). As a consequence of this transaction, which we refer to as the Heineken transaction, FEMSA now participates in the Heineken Holding N.V. Board of Directors, which we refer to as the Heineken Holding Board, and in the Heineken N.V. Supervisory Board, which we refer to as the Heineken Supervisory Board. However, FEMSA is not a majority or controlling shareholder of Heineken N.V. or Heineken Holding N.V., nor does it control the decisions of the Heineken Holding Board or the Heineken Supervisory Board. Therefore, the decisions made by the majority or controlling shareholders of Heineken N.V. or Heineken Holding N.V. or the Heineken Holding Board or the Heineken Supervisory Board may not be consistent with or may not consider the interests of FEMSA’s shareholders or may be adverse to the interests of FEMSA’s shareholders. Additionally, FEMSA has agreed not to disclose non-public information and decisions taken by Heineken.
Heineken is present in a large number of countries.
Heineken is a global brewer and distributor of beer in a large number of countries. As a consequence of the Heineken transaction, FEMSA shareholders are indirectly exposed to the political, economic and social circumstances affecting the markets in which Heineken is present, which may have an adverse effect on the value of FEMSA’s interest in Heineken, and, consequently, the value of FEMSA shares.
The Mexican peso may strengthen compared to the Euro.
In the event of a depreciation of the euro against the Mexican peso, the fair value of FEMSA’s investment in Heineken’s shares will be adversely affected.
Furthermore, the cash flow that is expected to be received in the form of dividends from Heineken will be in euros, and therefore, in the event of a depreciation of the euro against the Mexican peso, the amount of expected cash flow will be adversely affected.
Heineken N.V. and Heineken Holding N.V. are publicly listed companies.
Heineken N.V. and Heineken Holding N.V. are listed companies whose stock trades publicly and is subject to market fluctuation. A reduction in the price of Heineken N.V. or Heineken Holding N.V. shares would result in a reduction in the economic value of FEMSA’s participation in Heineken.
Risks Related to Our Principal Shareholders and Capital Structure
A majority of our voting shares are held by a voting trust, which effectively controls the management of our company, and the interests of which may differ from those of other shareholders.
As of March 19, 2015, a voting trust, of which the participants are members of seven families, owned 38.69% of our capital stock and 74.86% of our capital stock with full voting rights, consisting of the Series B Shares. Consequently, the voting trust has the power to elect a majority of the members of our board of directors and to play a significant or controlling role in the outcome of substantially all matters to be decided by our board of directors or our shareholders. The interests of the voting trust may differ from those of our other shareholders.See “Item 7. Major Shareholders and Related Party Transactions” and “Item 10. Additional Information—Bylaws—Voting Rights and Certain Minority Rights.”
Holders of Series D-B and D-L Shares have limited voting rights.
Holders of Series D-B and D-L Shares have limited voting rights and are only entitled to vote on specific matters, such as certain changes in the form of our corporate organization, dissolution, or liquidation, a merger with a company with a distinct corporate purpose, a merger in which we are not the surviving entity, a change of our jurisdiction of incorporation, the cancellation of the registration of the Series D-B and D-L Shares and any other matters that expressly require approval from such holders under the Mexican Securities Law. As a result of these limited voting rights, Series D-B and D-L holders will not be able to influence our business or operations.See “Item 7. Major Shareholders and Related Party Transactions—Major Shareholders” and “Item 10. Additional Information—Bylaws—Voting Rights and Certain Minority Rights.”
Holders of ADSs may not be able to vote at our shareholder meetings.
Our shares are traded on the New York Stock Exchange, or NYSE, in the form of ADSs. We cannot assure you that holders of our shares in the form of ADSs will receive notice of shareholders’ meetings from our ADS depositary in sufficient time to enable such holders to return voting instructions to the ADS depositary in a timely manner. In the event that instructions are not received with respect to any shares underlying ADSs, the ADS depositary will, subject to certain limitations, grant a proxy to a person designated by us in respect of these shares. In the event that this proxy is not granted, the ADS depositary will vote these shares in the same manner as the majority of the shares of each class for which voting instructions are received.
Holders of BD Units in the United States and holders of ADSs may not be able to participate in any future preemptive rights offering and as a result may be subject to dilution of their equity interests.
Under applicable Mexican law, if we issue new shares for cash as a part of a capital increase, other than in connection with a public offering of newly issued shares or treasury stock, we are generally required to grant our shareholders the right to purchase a sufficient number of shares to maintain their existing ownership percentage. Rights to purchase shares in these circumstances are known as preemptive rights. By law, we may not allow holders of our shares or ADSs who are located in the United States to exercise any preemptive rights in any future capital increases unless (1) we file a registration statement with the U.S. Securities and Exchange Commission, which we refer to as the SEC, with respect to that future issuance of shares or (2) the offering qualifies for an exemption from the registration requirements of the U.S. Securities Act of 1933. At the time of any future capital increase, we will evaluate the costs and potential liabilities associated with filing a registration statement with the SEC, as well as the benefits of preemptive rights to holders of our shares in the form of ADSs in the United States and any other factors that we consider important in determining whether to file a registration statement.
We may decide not to file a registration statement with the SEC to allow holders of our shares or ADSs who are located in the United States to participate in a preemptive rights offering. In addition, under current Mexican law, the sale by the ADS depositary of preemptive rights and the distribution of the proceeds from such sales to the holders of our shares in the form of ADSs is not possible. As a result, the equity interest of holders of our shares in the form of ADSs would be diluted proportionately.See “Item 10. Additional Information—Bylaws—Preemptive Rights.”
The protections afforded to minority shareholders in Mexico are different from those afforded to minority shareholders in the United States.
Under Mexican law, the protections afforded to minority shareholders are different from, and may be less than, those afforded to minority shareholders in the United States. Mexican laws do not provide a remedy to shareholders relating to violations of fiduciary duties. There is no procedure for class actions as such actions are conducted in the United States and there are different procedural requirements for bringing shareholder lawsuits against directors for the benefit of companies. Therefore, it may be more difficult for minority shareholders to enforce their rights against us, our directors or our controlling shareholders than it would be for minority shareholders of a United States company.
Investors may experience difficulties in enforcing civil liabilities against us or our directors, officers and controlling persons.
FEMSA is organized under the laws of Mexico, and most of our directors, officers and controlling persons reside outside the United States. In addition, nearly all or a substantial portion of our assets and the assets of our subsidiaries are located outside the United States. As a result, it may be difficult for investors to effect service of process within the United States on such persons or to enforce judgments against them, including any action based on civil liabilities under the U.S. federal securities laws. There is doubt as to the enforceability against such persons in Mexico, whether in original actions or in actions to enforce judgments of U.S. courts, of liabilities based solely on the U.S. federal securities laws.
Developments in other countries may adversely affect the market for our securities.
The market value of securities of Mexican companies is, to varying degrees, influenced by economic and securities market conditions in other emerging market countries. Although economic conditions are different in each country, investors’ reaction to developments in one country can have effects on the securities of issuers in other countries, including Mexico. We cannot assure you that events elsewhere, especially in emerging markets, will not adversely affect the market value of our securities.
The failure or inability of our subsidiaries to pay dividends or other distributions to us may adversely affect us and our ability to pay dividends to holders of ADSs.
We are a holding company. Accordingly, our cash flows are principally derived from dividends, interest and other distributions made to us by our subsidiaries. Currently, our subsidiaries do not have contractual obligations that require them to pay dividends to us. In addition, debt and other contractual obligations of our subsidiaries may in the future impose restrictions on our subsidiaries’ ability to make dividend or other payments to us, which in turn may adversely affect our ability to pay dividends to shareholders and meet our debt and other obligations. As of March 31, 2015, we had no restrictions on our ability to pay dividends. Given the 2010 exchange of 100% of our ownership of the business of Cuauhtémoc Moctezuma Holding, S.A. de C.V. (formerly FEMSA Cerveza, S.A. de C.V.) (which we refer to as Cuauhtémoc Moctezuma or FEMSA Cerveza) for a 20% economic interest in Heineken, our non-controlling shareholder position in Heineken means that we will be unable to require payment of dividends with respect to the Heineken shares.
Risks Related to Mexico and the Other Countries in Which We Operate
Adverse economic conditions in Mexico may adversely affect our financial position and results.
We are a Mexican corporation, and our Mexican operations are our single most important geographic territory. For the year ended December 31, 2014, 68% of our consolidated total revenues were attributable to Mexico and at the net income level the percentage attributable to our Mexican operations is further reduced. During 2011, 2012 and 2013 the Mexican gross domestic product, or GDP, increased by approximately 4.0%, 4.0% and 1.4%, respectively, and in 2014 it only increased by approximately 2.1% on an annualized basis compared to 2013, due to lower performance from the mining, transportation and warehousing sectors in addition to a tough consumer environment. We cannot assure you that such conditions will not have a material adverse effect on our results and financial position going forward. The Mexican economy continues to be heavily influenced by the U.S. economy, and therefore, deterioration in economic conditions in, or delays in recovery of, the U.S. economy may hinder any recovery in Mexico. In the past, Mexico has experienced both prolonged periods of weak economic conditions and deteriorations in economic conditions that have had a negative impact on our results.
Our business may be significantly affected by the general condition of the Mexican economy, or by the rate of inflation in Mexico, interest rates in Mexico and exchange rates for, or exchange controls affecting, the Mexican peso. Decreases in the growth rate of the Mexican economy, periods of negative growth and/or increases in inflation or interest rates may result in lower demand for our products, lower real pricing of our products or a shift to lower margin products. Because a large percentage of our costs and expenses are fixed, we may not be able to reduce costs and expenses upon the occurrence of any of these events, and our profit margins may suffer as a result.
In addition, an increase in interest rates in Mexico would increase the cost of our debt and would cause an adverse effect on our financial position and results. Mexican peso-denominated debt constituted 42.7% of our total debt as of December 31, 2014.
Depreciation of the Mexican peso relative to the U.S. dollar could adversely affect our financial position and results.
Depreciation of the Mexican peso relative to the U.S. dollar increases the cost to us of a portion of the raw materials we acquire, the price of which is paid in or determined with reference to U.S. dollars, and of our debt obligations denominated in U.S. dollars, and thereby negatively affects our financial position and results. A severe devaluation or depreciation of the Mexican peso may result in disruption of the international foreign exchange markets and may limit our ability to transfer or to convert Mexican pesos into U.S. dollars and other currencies for the purpose of making timely payments of interest and principal on our U.S. dollar-denominated debt or obligations in other currencies. The Mexican peso is a free-floating currency and as such, it experiences exchange rate fluctuations relative to the U.S. dollar over time. During 2011, 2012 and 2013, the Mexican peso experienced fluctuations relative to the U.S. dollar consisting of 12.7% of depreciation, 7.1% of recovery and 1.0% of depreciation, respectively, compared to the years of 2010, 2011 and 2012. During 2014, the Mexican peso experienced a depreciation relative to the U.S. dollar of approximately 12.6% compared to 2013. In the first quarter of 2015, the Mexican peso appreciated approximately 3.2% relative to the U.S. dollar compared to the fourth quarter of 2014.
While the Mexican government does not currently restrict, and since 1982 has not restricted, the right or ability of Mexican or foreign persons or entities to convert Mexican pesos into U.S. dollars or to transfer other currencies out of Mexico, the Mexican government could institute restrictive exchange rate policies in the future, as it has done in the past. Currency fluctuations may have an adverse effect on our financial position, results and cash flows in future periods.
When the financial markets are volatile, as they have been in recent periods, our results may be substantially affected by variations in exchange rates and commodity prices, and to a lesser degree, interest rates. These effects include foreign exchange gain and loss on assets and liabilities denominated in U.S. dollars, fair value gain and loss on derivative financial instruments, commodities prices and changes in interest income and interest expense. These effects can be much more volatile than our operating performance and our operating cash flows.
Political events in Mexico could adversely affect our operations.
Mexican political events may significantly affect our operations. Presidential elections in Mexico occur every six years, with the most recent one occurring in July 2012. Enrique Peña Nieto, a member of thePartido Revolucionario Institucional, was elected as the president of Mexico and took office on December 1, 2012. In addition, the Mexican Congress has recently approved a number of structural reforms intended to modernize certain sectors of and foster growth in the Mexican economy, and is continuing to approve further reforms. Now two years into his term, President Peña Nieto will face significant challenges as the structural reforms approved by the Mexican Congress begin having an effect on the Mexican economy and population. Furthermore, no single party has a majority in the Senate or theCámara de Diputados (House of Representatives), and the absence of a clear majority by a single party could result in government gridlock and political uncertainty. We cannot provide any assurances that political developments in Mexico, over which we have no control, will not have an adverse effect on our business, financial condition, results and prospects.
Security risks in Mexico could increase, and this could adversely affect our results.
The presence of violence among drug cartels, and between these and the Mexican law enforcement and armed forces, pose a risk to our business. Organized criminal activity and related violent incidents have decreased relative to 2012 and 2013, but remain prevalent in some parts of Mexico. These incidents are relatively concentrated along the northern Mexican border, as well as in certain other Mexican states such as Sinaloa, Michoacán and Guerrero. The north of Mexico is an important region for our retail operations, and an increase in crime rates could negatively affect our sales and customer traffic, increase our security expenses, and result in higher turnover of personnel or damage to the perception of our brands. This situation could worsen and adversely impact our business and financial results because consumer habits and patterns adjust to the increased perceived and real security risks, as people refrain from going out as much and gradually shift some on-premise consumption to off-premise consumption of food and beverages on certain social occasions.
Depreciation of local currencies in other Latin American countries in which we operate may adversely affect our financial position.
The devaluation of the local currencies against the U.S. dollar in our non-Mexican territories can increase our operating costs in these countries, and depreciation of the local currencies against the Mexican peso can negatively affect our results for these countries. In recent years, the value of the currency in the countries in which we operate has been relatively stable relative to the Mexican peso, except in Venezuela. During 2014, in addition to Venezuela, the currencies of Brazil and Argentina also depreciated against the Mexican peso. Future currency devaluation or the imposition of exchange controls in any of these countries, or in Mexico, would have an adverse effect on our financial position and results.
We have operated under exchange controls in Venezuela since 2003, which limits our ability to remit dividends abroad or make payments other than in local currency and that may increase the real price paid for raw materials and services purchased in local currency. We have historically used the official exchange rate (currently 6.30 bolivars to US$ 1.00) in our Venezuelan operations. Nonetheless, since the beginning of 2014, the Venezuelan government announced a series of changes to the Venezuelan exchange control regime.
In January 2014, the Venezuelan government announced an exchange rate determined by the state-run system known as theSistema Complementario de Administración de Divisas, or SICAD. In March 2014, the Venezuelan government announced a new law that authorized an alternative method of exchanging Venezuelan bolivars to U.S. dollars known as SICAD II. In February 2015, the Venezuelan government announced that it was replacing SICAD II with a new market-based exchange rate determined by the system known as the Sistema Marginal de Divisas, or SIMADI. The SICAD determines the exchange rates based on limited periodic sales of U.S. dollars through auctions in which only entities authorized by the Venezuelan government may participate, while SIMADI determines the exchange rates based on supply and demand of U.S. dollars, in which participation does not require authorization by the Venezuelan government. The SICAD and SIMADI exchange rates in effect as of April 17, 2015, were 12.00 and 196.66 bolivars per US$ 1.00, respectively.
We translated our results of operations in Venezuela for the full year ended December 31, 2014 into our reporting currency, the Mexican peso, using the SICAD II exchange rate of 49.99 bolivars to US$ 1.00, which was the exchange rate in effect as of such date. As a result, we recognized a reduction in equity of Ps. 11,836 million as of December 31, 2014 and as of such date, our foreign direct investment in Venezuela was Ps. 4,015 million. This reduction adversely affected our comprehensive income for the year ended December 31, 2014. In addition, the translation of our Venezuelan results adversely affected our financial results of operation in the amount of Ps. 1,895 million for the year ended December 31, 2014.
Based upon our specific facts and circumstances, we anticipate using the SIMADI exchange rate to translate our future results of operations in Venezuela into our reporting currency, the Mexican peso, commencing with our results for the first quarter of 2015. This translation effect will further adversely affect our comprehensive income and financial position. The Venezuelan government may announce further changes to the exchange rate system in the future. To the extent a higher exchange rate is applied to our investment in Venezuela in future periods as a result of changes to existing regulations, subsequently adopted regulations or otherwise, we could be required to further reduce the amount of our foreign direct investment in Venezuela and our comprehensive income in Venezuela and financial condition could be further adversely affected. More generally, future currency devaluations or the imposition of exchange controls in any of the countries in which we operate may potentially increase our operating costs, which could have an adverse effect on our financial position and comprehensive income.
ITEM 4. | INFORMATION ON THE COMPANY |
We are a Mexican company headquartered in Monterrey, Mexico, and our origin dates back to 1890. Our company was incorporated on May 30, 1936 and has a duration of 99 years. The duration can be extended indefinitely by resolution of our shareholders. Our legal name is Fomento Económico Mexicano, S.A.B. de C.V., and in commercial contexts we frequently refer to ourselves as FEMSA. Our principal executive offices are located at General Anaya No. 601 Pte., Colonia Bella Vista, Monterrey, Nuevo León 64410, Mexico. Our telephone number at this location is (52-81) 8328-6000. Our website is www.femsa.com. We are organized as asociedad anónima bursátil de capital variable under the laws of Mexico.
We conduct our operations through the following principal holding companies, each of which we refer to as a principal sub-holding company:
Coca-Cola FEMSA, which engages in the production, distribution and marketing of beverages;
FEMSA Comercio, which operates small-format stores; and
CB Equity, which holds our investment in Heineken.
FEMSA traces its origins to the establishment of Mexico’s first brewery, Cervecería Cuauhtémoc, S.A., which we refer to as Cuauhtémoc, which was founded in 1890 by four Monterrey businessmen: Francisco G. Sada, José A. Muguerza, Isaac Garza and José M. Schneider. Descendants of certain of the founders of Cuauhtémoc are participants of the voting trust that controls the management of our company.
The strategic integration of our company dates back to 1936 when our packaging operations were established to supply crown caps to the brewery. During this period, these operations were part of what was known as the Monterrey Group, which also included interests in banking, steel and other packaging operations.
In 1974, the Monterrey Group was split between two branches of the descendants of the founding families of Cuauhtémoc. The steel and other packaging operations formed the basis for the creation of Corporación Siderúrgica, S.A. (now Alfa, S.A.B. de C.V.), controlled by the Garza Sada family, and the beverage and banking operations were consolidated under the Valores Industriales, S.A. de C.V. (the corporate predecessor of FEMSA) corporate umbrella controlled by the Garza Lagüera family. FEMSA’s shares were first listed on what is now the Bolsa Mexicana de Valores, S.A.B. de C.V. (which we refer to as the Mexican Stock Exchange) on September 19, 1978. Between 1977 and 1981, FEMSA diversified its operations through acquisitions in the soft drinks and mineral water industries, the establishment of the first stores under the trade name OXXO and other investments in the hotel, construction, auto parts, food and fishing industries, which were considered non-core businesses and were subsequently divested.
In the 1990s, we began a series of strategic transactions to strengthen the competitive positions of our operating subsidiaries. These transactions included the sale of a 30% strategic interest in Coca-Cola FEMSA to a wholly-owned subsidiary of The Coca-Cola Company and a subsequent public offering of Coca-Cola FEMSA shares, both of which occurred in 1993. Coca-Cola FEMSA listed its L shares on the Mexican Stock Exchange and, in the form of ADS, on the New York Stock Exchange.
In 1998, we completed a reorganization that changed our capital structure by converting our outstanding capital stock at the time of the reorganization into BD Units and B Units, and united the shareholders of FEMSA and the former shareholders of Grupo Industrial Emprex, S.A. de C.V. (which we refer to as Emprex) at the same corporate level through an exchange offer that was consummated on May 11, 1998. As part of the reorganization, FEMSA listed ADSs on the NYSE representing BD Units, and listed the BD Units and its B Units on the Mexican Stock Exchange.
In May 2003, our subsidiary Coca-Cola FEMSA expanded its operations throughout Latin America by acquiring 100% of Panamerican Beverages, Inc., which we refer to as Panamco, then the largest soft drink bottler in Latin America in terms of sales volume in 2002. Through its acquisition of Panamco, Coca-Cola FEMSA began producing and distributingCoca-Cola trademark beverages in additional territories in Mexico, Central America, Colombia, Venezuela and Brazil, along with bottled water, beer and other beverages in some of these territories. The Coca-Cola Company and its subsidiaries received Series D Shares in exchange for their equity interest in Panamco of approximately 25%.
In April 2008, FEMSA shareholders approved a proposal to amend our bylaws in order to preserve the unit structure for our shares that has been in place since May 1998, and to maintain our existing share structure beyond May 11, 2008. Our bylaws previously provided that on May 11, 2008 our Series D-B Shares would convert into Series B Shares and our Series D-L Shares would convert into Series L Shares with limited voting rights. In addition, our bylaws provided that, on May 11, 2008, our current unit structure would cease to exist and each of our B Units would be unbundled into five Series B Shares, while each BD Unit would unbundle into three Series B Shares and two newly issued Series L Shares. Following the April 22, 2008 shareholder approvals, the automatic conversion of our share and unit structures no longer exist, and, absent shareholder action, our share structure will continue to be comprised of Series B Shares, which must represent not less than 51% of our outstanding capital stock, and Series D-B and Series D-L Shares, which together may represent up to 49% of our outstanding capital stock. Our Unit structure, absent shareholder action, will continue to consist of B Units, which bundle five Series B Shares, and BD Units, which bundle one Series B Share, two Series D-B Shares and two Series D-L Shares. See “Item 9. The Offer and Listing—Description of Securities.”
In January 2010, FEMSA announced that its Board of Directors unanimously approved a definitive agreement under which FEMSA would exchange its FEMSA Cerveza business for a 20% economic interest in Heineken, one of the world’s leading brewers. In April 2010, FEMSA announced the closing of the transaction, after Heineken N.V., Heineken Holding N.V. and FEMSA held their corresponding AGMs and approved the transaction. Under the terms of the agreement, FEMSA received 43,018,320 shares of Heineken Holding N.V. and 43,009,699 shares of Heineken N.V., with an additional 29,172,504 shares of Heineken N.V. (which shares we refer to as the Allotted Shares) delivered pursuant to an allotted share delivery instrument, or the ASDI. Heineken also assumed US$ 2.1 billion of indebtedness, including FEMSA Cerveza’s unfunded pension obligations. The Allotted Shares were delivered to FEMSA in several installments during 2010 and 2011, with the final installment delivered on October 5, 2011. As of December 31, 2014, FEMSA’s interest in Heineken N.V. represented 12.53% of Heineken N.V.’s outstanding capital and 14.94% of Heineken Holding N.V.’s outstanding capital, resulting in our 20% economic interest in the Heineken Group. The principal terms of the Heineken transaction documents are summarized below in “Item 10. Additional Information—Material Contracts.”
In 2012, Coca-Cola FEMSA began the construction of a production plant in Minas Gerais, Brazil, which was completed and began operations in November 2014. This project required an investment of R$584 million Brazilian reais (equivalent to approximately US$ 260 million). It is expected that the plant will generate approximately 700 direct and indirect jobs. The plant is located on a parcel of land 320,000 square meters in size, and it is expected that by the end of 2015 the annual production capacity will be approximately 1.2 billion liters of sparkling beverages (or approximately 200 million unit cases), representing an increase of approximately 62% as compared to the current installed capacity of Coca-Cola FEMSA’s plant in Belo Horizonte, Brazil.
In May 2012, Coca-Cola FEMSA closed its merger with Grupo Fomento Queretano, with operations mainly in the state of Querétaro, as well as in parts of the states of Mexico, Hidalgo, and Guanajuato.
On September 24, 2012, FEMSA signed definitive agreements to sell its wholly owned subsidiary Industria Mexicana de Quimicos, S.A. de C.V. (which we refer to as Quimiproductos) to a Mexican subsidiary of Ecolab Inc. (NYSE: ECL). Quimiproductos manufactures and provides cleaning and sanitizing products and services related to food and beverage industrial processes, as well as water treatment. The transaction is consistent with FEMSA’s long-standing strategy to divest non-core businesses. Quimiproductos was sold on December 31, 2012, resulting in a gain of Ps. 871 million.
In 2013, Coca-Cola FEMSA began the construction of a production plant in Tocancipá, Colombia, which was completed and began operations in February 2015. This project required an investment of 382 billion Colombian pesos (approximately US$ 194 million). Coca-Cola FEMSA expects that the plant will generate approximately 800 direct and indirect jobs. Certain permits are currently in process of being obtained, andCoca-Cola FEMSA expects to obtain these pending permits during 2015. Coca-Cola FEMSA is currently operating with water provided by the municipality, as an alternative source. The plant is located on a parcel of land 298,000 square meters in size, and it is expected that by the end of 2015, the annual production capacity will be approximately 730 million liters of sparkling beverages (or approximately 130 million unit cases), representing an increase of approximately 24% as compared to the current installed capacity of Coca-Cola FEMSA’s plants in Colombia.
On January 25, 2013, Coca-Cola FEMSA closed the transaction with The Coca-Cola Company to acquire a 51% non-controlling majority stake in CCFPI for US$ 688.5 million (Ps. 8,904 million) in an all-cash transaction. Coca-Cola FEMSA has an option to acquire the remaining 49% stake in CCFPI at any time during the seven years following the closing date. Coca-Cola FEMSA also has a put option to sell its ownership in CCFPI to The Coca-Cola Company commencing on the fifth anniversary of the closing date and ending on the sixth anniversary of the closing date. Coca-Cola FEMSA currently manages the day-to-day operations of the business; however, during a four-year period ending January 25, 2017 the business plan and other operational decisions must be approved jointly with The Coca-Cola Company. Coca-Cola FEMSA currently recognizes the results of CCFPI using the equity method.
In May 2013, Coca-Cola FEMSA closed its merger with Grupo Yoli, one of the oldest family-owned Coca-Cola bottlers in Mexico, operating mainly in the state of Guerrero as well as in parts of the state of Oaxaca.
On May 2, 2013, FEMSA Comercio through one of its subsidiaries, Cadena Comercial de Farmacias, S.A.P.I. de C.V. (which we refer to as CCF), closed the acquisition of Farmacias YZA, a leading drugstore operator in Southeast Mexico, headquartered in Merida, Yucatan. The founding shareholders of Farmacias YZA hold a 25% stake in CCF. In a separate transaction, on May 13, 2013, CCF acquired Farmacias FM Moderna, a leading drugstore operator in the western state of Sinaloa.
In August 2013, Coca-Cola FEMSA closed its acquisition of Companhia Fluminense de Refrigerantes (which we refer to as Companhia Fluminense), a family owned franchise that operates in parts of the states of São Paulo, Minas Gerais and Rio de Janeiro in Brazil. Companhia Fluminense sold approximately 56.6 million unit cases (including beer) in the twelve months ended March 31, 2013.
In October 2013, the Board of Directors agreed to separate the roles of Chairman of the Board and Chief Executive Officer, ratifying José Antonio Fernández Carbajal as Executive Chairman of the Board and naming Carlos Salazar Lomelín as the new Chief Executive Officer of FEMSA.
In October 2013, Coca-Cola FEMSA closed its acquisition of Spaipa, the second largest family owned franchise in Brazil, with operations in the state of Paraná and in parts of the state of São Paulo.
In December 2013, FEMSA Comercio, through one of its subsidiaries, purchased the operating assets and trademarks of Doña Tota, a leading quick-service restaurant operator in Mexico. The founding shareholders of Doña Tota hold a 20% stake in the FEMSA Comercio subsidiary that now operates the Doña Tota business.
In December 2014, FEMSA Comercio through CCF, agreed to acquire 100% of Farmacias Farmacón, a regional pharmacy chain consisting of 213 stores in the northwestern Mexican states of Sinaloa, Sonora, Baja California and Baja California Sur. The transaction is pending customary regulatory approvals, and is expected to close during the second quarter of 2015.
For more information on Coca-Cola FEMSA’s recent transactions, see“Item 4. Information on the Company—Coca-Cola FEMSA.”
We conduct our business through our principal sub-holding companies as shown in the following diagram and table:
Principal Sub-holding Companies—Ownership Structure
As of March 31, 2015
(1) | Compañía Internacional de Bebidas, S.A. de C.V., which we refer to as CIBSA. |
(2) | Percentage of issued and outstanding capital stock owned by CIBSA (63.0% of shares with full voting rights). |
(3) | Ownership in CB Equity held through various FEMSA subsidiaries. |
(4) | Combined economic interest in Heineken N.V. and Heineken Holding N.V. |
The following table presents an overview of our operations by reportable segment and by geographic area:
Operations by Segment—Overview
Year Ended December 31, 2014 and % of growth (decrease) vs. last year
(in million of Mexican pesos, except for employees and percentages)
Coca-Cola FEMSA | FEMSA Comercio | CB Equity(1) | ||||||||||||||||||||||
Total revenues | Ps. 147,298 | (6 | %) | Ps. 109,624 | 12 | % | Ps. — | — | ||||||||||||||||
Gross Profit | 68,382 | (6 | %) | 39,386 | 14 | % | — | — | ||||||||||||||||
Share of the (loss) profit of associates and joint ventures accounted for using the equity method, net of taxes | (125 | ) | (143 | %)(2) | 37 | 236 | % | 5,244 | 14 | % | ||||||||||||||
Total assets | 212,366 | (2 | %) | 43,722 | 10 | % | 85,742 | 4 | % | |||||||||||||||
Employees | 83,371 | (2 | %) | 110,671 | 7 | % | — | — |
(1) | CB Equity holds our Heineken N.V. and Heineken Holding N.V. shares. |
(2) | Reflects the percentage decrease between the gain of ps. 289 million recorded in 2013 and the loss of ps. 125 million recorded in 2014. |
Total Revenues Summary by Segment(1)
Year Ended December 31, | ||||||||||||
2014 | 2013 | 2012 | ||||||||||
Coca-Cola FEMSA | Ps.147,298 | Ps. 156,011 | Ps. 147,739 | |||||||||
FEMSA Comercio | 109,624 | 97,572 | 86,433 | |||||||||
Other | 20,069 | 17,254 | 15,899 | |||||||||
Consolidated total revenues | Ps. 263,449 | Ps. 258,097 | Ps. 238,309 |
(1) | The sum of the financial data for each of our segments and percentages with respect thereto differ from our consolidated financial information due to intercompany transactions, which are eliminated in consolidation, and certain assets and activities of FEMSA. |
Total Revenues Summary by Geographic Area(1)
Year Ended December 31, | ||||||||||||
2014 | 2013 | 2012 | ||||||||||
Mexico and Central America(2) | Ps. 186,736 | Ps. 171,726 | Ps. 155,576 | |||||||||
South America(3) | 69,172 | 55,157 | 56,444 | |||||||||
Venezuela | 8,835 | 31,601 | 26,800 | |||||||||
Consolidated total revenues | 263,449 | 258,097 | 238,309 |
(1) | The sum of the financial data for each geographic area differs from our consolidated financial information due to intercompany transactions, which are eliminated in consolidation. |
(2) | Central America includes Guatemala, Nicaragua, Costa Rica and Panama. Domestic (Mexico-only) revenues were Ps. 178,125 million, Ps. 163,351 million and Ps. 148,098 million for the years ended December 31, 2014, 2013 and 2012, respectively. |
(3) | South America includes Brazil, Colombia and Argentina. South America revenues include Brazilian revenues of Ps. 45,799 million, Ps. 31,138 million and Ps. 30,930 million; Colombian revenues of Ps. 14,207 million, Ps. 13,354 million and Ps. 14,597 million; and Argentine revenues of Ps. 9,714 million, Ps. 10,729 million and Ps. 10,270 million, for the years ended December 31, 2014, 2013 and 2012, respectively. |
The following table sets forth our significant subsidiaries as of December 31, 2014:
Name of Company | Jurisdiction of Establishment | Percentage Owned | ||||
CIBSA: | Mexico | 100.0 | % | |||
Coca-Cola FEMSA | Mexico | 47.9 | %(1) | |||
Emprex: | Mexico | 100.0 | % | |||
FEMSA Comercio | Mexico | 100.0 | % | |||
CB Equity(2) | United Kingdom | 100.0 | % |
(1) | Percentage of capital stock. FEMSA, through CIBSA, owns 63.0% of the shares of Coca-Cola FEMSA with full voting rights. |
(2) | Ownership in CB Equity held through various FEMSA subsidiaries. CB Equity holds our Heineken N.V and Heineken Holding N.V. shares. |
FEMSA is a leading company that participates in the beverage industry through Coca-Cola FEMSA, the largest franchise bottler of Coca-Cola products in the world; and in the beer industry, through its ownership of the second largest equity stake in Heineken, one of the world’s leading brewers with operations in over 70 countries. In the retail industry FEMSA participates with FEMSA Comercio, operating various small-format store chains including OXXO, the largest and fastest-growing in the Americas. Additionally, through its strategic businesses, FEMSA provides logistics, point-of-sale refrigeration solutions and plastics solutions to FEMSA’s business units and third-party clients.
We understand the importance of connecting with our end consumers by interpreting their needs, and ultimately delivering the right products to them for the right occasions and the optimal value proposition. We strive to achieve this by developing brand value, expanding our significant distribution capabilities, and improving the efficiency of our operations while aiming to reach our full potential. We continue to improve our information gathering and processing systems in order to better know and understand what our consumers want and need, and we are improving our production and distribution by more efficiently leveraging our asset base.
We believe that the competencies that our businesses have developed can be replicated in other geographic regions. This underlying principle guided our consolidation efforts, which led to our current continental footprint. We have presence in Mexico, Central and South America and the Philippines including some of the most populous metropolitan areas in Latin America—which has provided us with opportunities to create value through both an improved ability to execute our strategies and the use of superior marketing tools. We have also increased our capabilities to operate and succeed in other geographic regions, by developing management to gain an understanding of local consumer needs. Going forward, we intend to use those capabilities to continue our international expansion of both Coca-Cola FEMSA and FEMSA Comercio, expanding both our geographic footprint and our presence in the non-alcoholic beverage industry and small box retail formats, as well as taking advantage of potential opportunities to leverage our skill set and key competencies.
Our objective is to create economic, social and environmental value for our stakeholders—including our employees, our consumers, our shareholders and the enterprises and institutions within our society—now and into the future.
Overview
Coca-Cola FEMSA is the largest franchise bottler ofCoca-Colatrademark beverages in the world. It operates in territories in the following countries:
Mexico – a substantial portion of central Mexico, the southeast and northeast of Mexico (including the Gulf region).
Central America – Guatemala (Guatemala City and surrounding areas), Nicaragua (nationwide), Costa Rica (nationwide) and Panama (nationwide).
Colombia – most of the country.
Venezuela – nationwide.
Brazil – a major part of the states of São Paulo and Minas Gerais, the states of Paraná and Mato Grosso do Sul and part of the states of Rio de Janeiro and Goiás.
Argentina – Buenos Aires and surrounding areas.
Philippines – nationwide (through a joint venture with The Coca-Cola Company).
Coca-Cola FEMSA was incorporated on October 30, 1991 as a stock corporation with variable capital (sociedad anónima de capital variable) under the laws of Mexico for a term of 99 years. On December 5, 2006, as required by amendments to the Mexican Securities Market Law, Coca-Cola FEMSA became a publicly traded stock corporation with variable capital (sociedad anónima bursátil de capital variable). Coca-Cola FEMSA’s legal name is Coca-Cola FEMSA, S.A.B. de C.V. Coca-Cola FEMSA’s principal executive offices are located at Calle Mario Pani No. 100, Colonia Santa Fe Cuajimalpa, Delegación Cuajimalpa de Morelos, 05348, México, D.F., México. Coca-Cola FEMSA’s telephone number at this location is (52-55) 1519-5000. Coca-Cola FEMSA’s website iswww.coca-colafemsa.com.
The following is an overview of Coca-Cola FEMSA’s operations by consolidated reporting segment in 2014.
Operations by Consolidated Reporting Segment—Overview
Year Ended December 31, 2014
Total Revenues (millions of Mexican pesos) | Percentage of Total Revenues | Gross Profit (millions of Mexican pesos) | Percentage of Gross Profit | |||||||||||||
Mexico and Central America(1) | 71,965 | 48.9 | % | 36,453 | 53.3 | % | ||||||||||
South America(2) (excluding Venezuela) | 66,367 | 45.0 | % | 27,372 | 40.0 | % | ||||||||||
Venezuela | 8,966 | 6.1 | % | 4,557 | 6.7 | % | ||||||||||
|
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Consolidated | 147,298 | 100.0 | % | 68,382 | 100.0 | % |
(1) | Includes Mexico, Guatemala, Nicaragua, Costa Rica and Panama. |
(2) | Includes Colombia, Brazil and Argentina. |
Corporate History
Coca-Cola FEMSA commenced operations in 1979, when one of our subsidiaries acquired certain sparkling beverage bottlers. In 1991, we transferred our ownership in the bottlers to FEMSA Refrescos, S.A. de C.V., the corporate predecessor to Coca-Cola FEMSA, S.A.B. de C.V.
In June 1993, a subsidiary of The Coca-Cola Company subscribed for 30% of Coca-Cola FEMSA’s capital stock in the form of Series D shares. In September 1993, we sold Series L shares that represented 19.0% of Coca-Cola FEMSA’s capital stock to the public, and Coca-Cola FEMSA listed these shares on the Mexican Stock Exchange and, in the form of ADSs, on the New York Stock Exchange.
In a series of transactions since 1994, Coca-Cola FEMSA has acquired new territories, brands and other businesses which today comprise Coca-Cola FEMSA’s business. In May 2003, Coca-Cola FEMSA acquired Panamco and began producing and distributingCoca-Colatrademark beverages in additional territories in the central and gulf regions of Mexico and in Central America (Guatemala, Nicaragua, Costa Rica and Panama), Colombia, Venezuela and Brazil, along with bottled water, beer and other beverages in some of these territories.
In November 2006, we acquired 148,000,000 of Coca-Cola FEMSA’s Series D shares from certain subsidiaries of The Coca-Cola Company, which increased our ownership of Coca-Cola FEMSA to 53.7%.
In November 2007, Coca-Cola FEMSA acquired together with The Coca-Cola Company 100% of the shares of capital stock of Jugos del Valle, S.A.P.I. de C.V., or Jugos del Valle. In 2008, Coca-Cola FEMSA, The Coca-Cola Company and all Mexican and BrazilianCoca-Cola bottlers entered into a joint business for the Mexican and Brazilian operations, respectively, of Juegos del Valle.
In December 2007 and May 2008, Coca-Cola FEMSA sold most of its proprietary brands to The Coca-Cola Company. The proprietary brands are now being licensed back to Coca-Cola FEMSA by The Coca-Cola Company pursuant to its bottler agreements.
In May 2008, Coca-Cola FEMSA entered into a transaction with The Coca-Cola Company to acquire its wholly owned bottling franchise Refrigerantes Minas Gerais, Ltda., or REMIL, located in the State of Minas Gerais in Brazil.
In July 2008, Coca-Cola FEMSA acquired the Agua De Los Angeles bulk water business in the Valley of Mexico (Mexico City and surrounding areas) from Grupo Embotellador CIMSA, S.A. de C.V., at the time one of the Coca-Cola bottling franchises in Mexico. The trademarks remain with The Coca-Cola Company. Coca-Cola FEMSA subsequently merged Agua De Los Angeles into its bulk water business under theCielbrand.
In February 2009, Coca-Cola FEMSA together with The Coca-Cola Company acquired the Brisa bottled water business in Colombia from Bavaria, S.A., a subsidiary of SABMiller plc. Coca-Cola FEMSA acquired the production assets and the distribution territory and The Coca-Cola Company acquired theBrisa brand.
In May 2009, Coca-Cola FEMSA entered into an agreement to manufacture, distribute and sell theCrystal trademark water products in Brazil jointly with The Coca-Cola Company.
In August 2010, Coca-Cola FEMSA acquired from The Coca-Cola Company along with other Brazilian Coca-Cola bottlers Leão Alimentos e Bebidas, Ltda. or Leão Alimentos, manufacturer and distributor of theMatte Leão tea brand.
In March 2011, Coca-Cola FEMSA together with The Coca-Cola Company acquired Grupo Industrias Lacteas, S.A. (also known as Estrella Azul), a Panamanian conglomerate that participates in the dairy and juice-based beverage categories in Panama.
In October 2011, Coca-Cola FEMSA merged with Grupo Tampico, one of the largest family-ownedCoca-Cola bottlers in Mexico in terms of sales volume with operations in the states of Tamaulipas, San Luis Potosí, and Veracruz, as well as in parts of the states of Hidalgo, Puebla and Queretaro.
In December 2011, Coca-Cola FEMSA merged with Grupo CIMSA and its shareholders, a Mexican family-ownedCoca-Cola bottler with operations mainly in the states of Morelos and Mexico, as well as in parts of the states of Guerrero and Michoacán. As part of its merger with Grupo CIMSA, Coca-Cola FEMSA also acquired a 13.2% equity interest in Promotora Industrial Azucarera, S.A de C.V., or PIASA.
In May 2012, Coca-Cola FEMSA merged with Grupo Fomento Queretano, one of the oldest family-owned beverage players in theCoca-Cola system in Mexico, with operations mainly in the state of Querétaro, as well as in parts of the states of Mexico, Hidalgo and Guanajuato. For further information, see Note 4 to our audited consolidated financial statements. As part of Coca-Cola FEMSA’s merger with Grupo Fomento Queretano it also acquired an additional 12.9% equity interest in PIASA.
In August 2012, Coca-Cola FEMSA acquired, through Jugos del Valle, an indirect participation in Santa Clara Mercantil de Pachuca, S.A. de C.V., or Santa Clara, a producer of milk and dairy products in Mexico.
In January 2013, Coca-Cola FEMSA together with The Coca-Cola Company acquired a 51% non- controlling majority stake in CCFPI in an all-cash transaction.
In May 2013, Coca-Cola FEMSA merged with Grupo Yoli, one of the oldest family-owned Coca-Cola bottlers in Mexico, with operations mainly in the state of Guerrero as well as in parts of the state of Oaxaca. For further information, see Note 4 to our audited consolidated financial statements. As part of its merger with Grupo Yoli, Coca-Cola FEMSA also acquired an additional 10.1% equity interest in PIASA for a total ownership of 36.3%.
In August 2013, Coca-Cola FEMSA acquired Companhia Fluminense, a family owned franchise that operates in parts of the states of São Paulo, Minas Gerais and Rio de Janeiro in Brazil. For further information, see Note 4 to our audited consolidated financial statements. As part of Coca-Cola FEMSA’s acquisition of Companhia Fluminense, Coca-Cola FEMSA also acquired an additional 1.2% equity interest in Leão Alimentos.
In October 2013, Coca-Cola FEMSA acquired Spaipa, the second largest family owned franchise in Brazil, with operations in the state of Paraná and in parts of the state of São Paulo. For further information, see Note 4 to our audited consolidated financial statements. As part of its acquisition of Spaipa, Coca-Cola FEMSA also acquired an additional 5.8% equity interest in Leão Alimentos, for a total ownership as of April 10, 2015 of 24.4%, and a 50.0% stake in Fountain Água Mineral Ltda., a joint venture to develop the water category together with The Coca-Cola Company.
For further information see “Item 7. Major Shareholders and Related Party Transactions—Related Party Transactions—Business Transactions between Coca-Cola FEMSA, FEMSA and The Coca-Cola Company.”
Capital Stock
As of April 17, 2015, we indirectly owned Series A shares equal to 47.9% of Coca-Cola FEMSA’s capital stock (63.0% of Coca-Cola FEMSA’s capital stock with full voting rights). As of April 17, 2015, The Coca-Cola Company indirectly owned Series D shares equal to 28.1% of the capital stock of Coca-Cola FEMSA (37.0% of the capital stock with full voting rights). Series L shares with limited voting rights, which trade on the Mexican Stock Exchange and in the form of ADSs on the New York Stock Exchange, constitute the remaining 24.0% of Coca-Cola FEMSA’s capital stock.
Business Strategy
Coca-Cola FEMSA operates with a large geographic footprint in Latin America. In January 2015, Coca-Cola FEMSA restructured its operations under four new divisions: (1) Mexico (covering certain territories in Mexico); (2) Latin America (covering certain territories in Guatemala, and all of Nicaragua, Costa Rica and Panama, certain territories in Argentina, most of Colombia and all of Venezuela), (3) Brazil (covering a major part of the states of São Paulo and Minas Gerais, the states of Paraná and Mato Grosso do Sul and part of the states of Rio de Janeiro and Goiás), and (4) Asia (covering all of the Philippines through a joint venture with The Coca-Cola Company). Through these divisions, Coca-Cola FEMSA has created a more flexible structure to execute its strategies and continue with its track record of growth. Coca-Cola FEMSA has also aligned its business strategies more efficiently, ensuring a faster introduction of new products and categories, and a more rapid and effective design and deployment of commercial models.
One of Coca-Cola FEMSA’s goals is to maximize growth and profitability to create value for its shareholders. Coca-Cola FEMSA’s efforts to achieve this goal are based on: (1) transforming its commercial models to focus on its customers’ value potential and using a value-based segmentation approach to capture the industry’s value potential; (2) implementing multi-segmentation strategies in its major markets to target distinct market clusters divided by consumption occasion, competitive intensity and socioeconomic levels; (3) implementing well-planned product, packaging and pricing strategies through different distribution channels; (4) driving product innovation along its different product categories; (5) developing new businesses and distribution channels; and (6) achieving the full operating potential of its commercial models and processes to drive operational efficiencies throughout its company. In furtherance of these efforts, Coca-Cola FEMSA intends to continue to focus on, among other initiatives, the following:
working with The Coca-Cola Company to develop a business model to continue exploring and participating in new lines of beverages, extending existing product lines and effectively advertising and marketing its products;
developing and expanding its still beverage portfolio through innovation, strategic acquisitions and by entering into agreements to acquire companies with The Coca-Cola Company;
expanding its bottled water strategy with The Coca-Cola Company through innovation and selective acquisitions to maximize profitability across its market territories;
strengthening its selling capabilities and go-to-market strategies, including pre-sale, conventional selling and hybrid routes, in order to get closer to its clients and help them satisfy the beverage needs of consumers;
• | implementing selective packaging strategies designed to increase consumer demand for its products and to build a strong returnable base for theCoca-Cola brand; |
replicating its best practices throughout the value chain;
rationalizing and adapting its organizational and asset structure in order to be in a better position to respond to a changing competitive environment;
building a multi-cultural collaborative team, from top to bottom; and
broadening its geographic footprint through organic growth and strategic joint ventures, mergers and acquisitions.
Coca-Cola FEMSA seeks to increase per capita consumption of its products in the territories in which it operates. To that end, Coca-Cola FEMSA’s marketing teams continuously develop sales strategies tailored to the different characteristics of its various territories and distribution channels. Coca-Cola FEMSA continues to develop its product portfolio to better meet market demand and maintain its overall profitability. To stimulate and respond to consumer demand, Coca-Cola FEMSA continues to introduce new categories, products and presentations.See “—Product and Packaging Mix.” In addition, because Coca-Cola FEMSA views its relationship with The Coca-Cola Company as integral to its business, Coca-Cola FEMSA uses market information systems and strategies developed with The Coca-Cola Company to improve its business and marketing strategies.See “—Marketing.”
Coca-Cola FEMSA also continuously seeks to increase productivity in its facilities through infrastructure and process reengineering for improved asset utilization. Coca-Cola FEMSA’s capital expenditure program includes investments in production and distribution facilities, bottles, cases, coolers and information systems. Coca-Cola FEMSA believes that this program will allow it to maintain its capacity and flexibility to innovate and to respond to consumer demand for its products.
In early 2015, Coca-Cola FEMSA redesigned its corporate structure to strengthen the core functions of its organization. Through this restructuring, Coca-Cola FEMSA created specialized departments, focused on its supply chain, commercial, and IT innovation areas (centros de excelencia). These departments not only enable centralized collaboration and knowledge sharing, but also drive standards of excellence and best practices in Coca-Cola FEMSA’s key strategic capabilities. Coca-Cola FEMSA’s priorities include enhanced manufacturing efficiency, improved distribution and logistics, and cutting-edge IT-enabled commercial innovation.
Coca-Cola FEMSA focuses on management quality as a key element of its growth strategy and remains committed to fostering the development of quality management at all levels. Coca-Cola FEMSA’s Strategic Talent Management Model is designed to enable it to reach its full potential by developing the capabilities of its employees and executives. This holistic model works to build the skills necessary for Coca-Cola FEMSA’s employees and executives to reach their maximum potential, while contributing to the achievement of its short- and long-term objectives. To support this capability development model, Coca-Cola FEMSA’s board of directors has allocated a portion of its yearly operating budget to fund these management training programs.
Sustainable development is a comprehensive part of Coca-Cola FEMSA’s strategic framework for business operation and growth. Coca-Cola FEMSA bases its efforts in its core foundation, its ethics and values. Coca-Cola FEMSA focuses on three core areas, (i) its people, by encouraging the comprehensive development of its employees and their families; (ii) its communities, by promoting the generation of sustainable communities in which it serves, an attitude of health, self-care, adequate nutrition and physical activity, and evaluating the impact of its value chain; and (iii) the planet, by establishing guidelines that it believes will result in efficient use of natural resources to minimize the impact that its operations might have on the environment and create a broader awareness of caring for the environment.
CCFPI Joint Venture
On January 25, 2013, as part of Coca-Cola FEMSA’s efforts to expand its geographic reach, it acquired a 51% non-controlling majority stake in CCFPI. Coca-Cola FEMSA currently manages the day-to-day operations of the business; however, during a four-year period ending January 25, 2017 the business plan and other operational decisions must be approved jointly with The Coca-Cola Company. As of December 31, 2014, Coca-Cola FEMSA’s investment under the equity method in CCFPI was Ps. 9,021 million. See Notes 10 and 26 to our audited consolidated financial statements. Coca-Cola FEMSA’s product portfolio in the Philippines consists ofCoca-Cola trademark beverages and Coca-Cola FEMSA’s total sales volume in 2014 reached 513 million unit cases. The operations of CCFPI are comprised of 19 production plants and serve close to 853,242 customers.
The Philippines has one of the highest per capita consumption rates ofCoca-Cola products in the region and presents significant opportunities for further growth.Coca-Cola has been present in the Philippines since the start of the 20th century and since 1912 it has been locally producingCoca-Colaproducts. The Philippines received the first Coca-Cola bottling and distribution franchise in Asia. Coca-Cola FEMSA’s strategic framework for growth in the Philippines is based on three pillars: portfolio, route to market and supply chain.
Coca-Cola FEMSA’s Territories
The following map shows Coca-Cola FEMSA’s territories, giving estimates in each case of the population to which it offer products, the number of retailers of its beverages and the per capita consumption of its beverages as of December 31, 2014:
Per capita consumption data for a territory is determined by dividing total beverage sales volume within the territory (in unit cases) by the estimated population within such territory, and is expressed on the basis of the number of eight-ounce servings of Coca-Cola FEMSA’s products consumed annually per capita. In evaluating the development of local volume sales in Coca-Cola FEMSA’s territories and to determine product potential, Coca-Cola FEMSA and The Coca-Cola Company measure, among other factors, the per capita consumption of all their beverages.
Coca-Cola FEMSA’s Products
Coca-Cola FEMSA produces, markets, sells and distributesCoca-Cola trademark beverages. TheCoca-Cola trademark beverages include: sparkling beverages (colas and flavored sparkling beverages), waters and still beverages (including juice drinks, coffee, teas, milk, value-added dairy and isotonic drinks). The following table sets forth Coca-Cola FEMSA’s main brands as of December 31, 2014:
Colas: | Mexico and Central America(1) | South America(2) | Venezuela | |||
Coca-Cola | ü | ü | ü | |||
Coca-Cola Light | ü | ü | ü | |||
Coca-Cola Zero | ü | ü | ||||
Coca-Cola Life | ü | ü | ||||
Flavored sparkling beverages: | Mexico and Central America(1) | South America(2) | Venezuela | |||
Ameyal | ü | |||||
Canada Dry | ü | |||||
Chinotto | ü | |||||
Crush | ü | |||||
Escuis | ü | |||||
Fanta | ü | ü | ||||
Fresca | ü | |||||
Frescolita | ü | ü | ||||
Hit | ü | |||||
Kist | ü | |||||
Kuat | ü | |||||
Lift | ü | |||||
Mundet | ü | |||||
Quatro | ü | |||||
Schweppes | ü | ü | ü | |||
Simba | ü | |||||
Sprite | ü | ü | ||||
Victoria | ü | |||||
Yoli | ü | |||||
Water: | Mexico and Central America(1) | South America(2) | Venezuela | |||
Alpina | ü | |||||
Aquarius(3) | ü | |||||
Bonaqua | ü | |||||
Brisa | ü | |||||
Ciel | ü | |||||
Crystal | ü | |||||
Dasani | ü | |||||
Manantial | ü | |||||
Nevada | ü | |||||
Other Categories: | Mexico and Central America(1) | South America(2) | Venezuela | |||
Cepita(4) | ü | |||||
Del Prado(5) | ü | |||||
Estrella Azul(6) | ü | |||||
FUZE Tea | ü | ü | ||||
Hi-C(7) | ü | ü | ||||
Santa Clara(8) | ü | |||||
Jugos del Valle(4) | ü | ü | ü | |||
Matte Leão(9) | ü | |||||
Powerade(10) | ü | ü | ü | |||
Valle Frut(11) | ü | ü | ü |
(1) | Includes Mexico, Guatemala, Nicaragua, Costa Rica and Panama. |
(2) | Includes Colombia, Brazil and Argentina. |
(3) | Flavored water. In Brazil, also a flavored sparkling beverage. |
(4) | Juice-based beverage. |
(5) | Juice-based beverage in Central America. |
(6) | Milk and value-added dairy and juices. |
(7) | Juice-based beverage. Includes Hi-C Orangeade in Argentina. |
(8) | Milk, value-added dairy and coffee. |
(9) | Ready to drink tea. |
(10) | Isotonic drinks. |
(11) | Orangeade. IncludesDel Valle Freshin Costa Rica, Nicaragua, Panama, Colombia and Venezuela. |
Sales Overview
Coca-Cola FEMSA measures total sales volume in terms of unit cases. “Unit case” refers to 192 ounces of finished beverage product (24 eight-ounce servings) and, when applied to soda fountains, refers to the volume of syrup, powders and concentrate that is required to produce 192 ounces of finished beverage product. The following table illustrates Coca-Cola FEMSA’s historical sales volume for each of its consolidated territories.
Year Ended December 31, | ||||||||||||
2014 | 2013 (1) | 2012(2) | ||||||||||
(millions of unit cases) | ||||||||||||
Mexico and Central America | ||||||||||||
Mexico | 1,754.9 | 1,798.0 | 1,720.3 | |||||||||
Central America(3) | 163.6 | 155.6 | 151.2 | |||||||||
South America (excluding Venezuela) | ||||||||||||
Colombia | 298.4 | 275.7 | 255.8 | |||||||||
Brazil(4) | 733.5 | 525.2 | 494.2 | |||||||||
Argentina | 225.8 | 227.1 | 217.0 | |||||||||
Venezuela | 241.1 | 222.9 | 207.7 | |||||||||
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Consolidated Volume | 3,417.3 | 3,204.5 | 3,046.2 |
(1) | Includes volume from the operations of Grupo Yoli from June 2013, Companhia Fluminense from September 2013 and Spaipa from November 2013. |
(2) | Includes volume from the operations of Grupo Fomento Queretano from May 2012. |
(3) | Includes Guatemala, Nicaragua, Costa Rica and Panama. |
(4) | Excludes beer sales volume. |
Product and Packaging Mix
Out of the more than 116 brands and line extensions of beverages that Coca-Cola FEMSA sells and distributes, Coca-Cola FEMSA’s most important brand, Coca-Cola, together with its line extensions,Coca-Cola Light,Coca-Cola Lifeand Coca-Cola Zero, accounted for 61.0% of total sales volume in 2014. Coca-Cola FEMSA’s next largest brands,Ciel(a water brand from Mexico and its line extensions),Fanta (and its line extensions),Sprite (and its line extensions) andValleFrut (and its line extensions) accounted for 11.6%, 5.1%, 2.8% and 2.7%, respectively, of total sales volume in 2014. Coca-Cola FEMSA uses the term line extensions to refer to the different flavors in which it offers its brands. Coca-Cola FEMSA produces, markets, sells and distributesCoca-Cola trademark beverages in each of its territories in containers authorized by The Coca-Cola Company, which consist of a variety of returnable and non-returnable presentations in the form of glass bottles, cans and plastic bottles mainly made of polyethylene terephthalate, which we refer to as PET.
Coca-Cola FEMSA uses the term presentation to refer to the packaging unit in which it sells its products. Presentation sizes for Coca-Cola FEMSA’sCoca-Cola trademark beverages range from a 6.5-ounce personal size to a 3-liter multiple serving size. For all of Coca-Cola FEMSA’s products excluding water, Coca-Cola FEMSA considers a multiple serving size as equal to, or larger than, 1.0 liter. In general, personal sizes have a higher price per unit case as compared to multiple serving sizes. Coca-Cola FEMSA offers both returnable and non-returnable
presentations, which allow it to offer portfolio alternatives based on convenience and affordability to implement revenue management strategies and to target specific distribution channels and population segments in its territories. In addition, Coca-Cola FEMSA sells someCoca-Cola trademark beverage syrups in containers designed for soda fountain use, which we refer to as fountain. Coca-Cola FEMSA also sells bottled water products in bulk sizes, which refer to presentations equal to or larger than 5.0 liters, which have a much lower average price per unit case than its other beverage products.
The characteristics of Coca-Cola FEMSA’s territories are very diverse. Central Mexico and Coca-Cola FEMSA’s territories in Argentina are densely populated and have a large number of competing beverage brands as compared to the rest of its territories. Coca-Cola FEMSA’s territories in Brazil are densely populated but have lower per capita consumption of beverage products as compared to Mexico. Portions of southern Mexico, Central America and Colombia are large and mountainous areas with lower population density, lower per capita income and lower per capita consumption of beverages. In Venezuela, Coca-Cola FEMSA faces operational disruptions from time to time, which may have an effect on its volumes sold, and consequently, may result in lower per capita consumption.
The following discussion analyzes Coca-Cola FEMSA’s product and packaging mix by its consolidated reporting segments. The volume data presented is for the years 2014, 2013 and 2012.
Mexico and Central America. Coca-Cola FEMSA’s product portfolio consists ofCoca-Cola trademark beverages, including theJugos del Valle line of juice-based beverages.Per capita consumption of Coca-Cola FEMSA’s beverage products in Mexico and Central America was 607.5 and 189.1 eight-ounce servings, respectively, in 2014.
The following table highlights historical sales volume and mix in Mexico and Central America for Coca-Cola FEMSA’s products:
Year Ended December 31, | ||||||||||||
2014 | 2013(1) | 2012(2) | ||||||||||
Total Sales Volume | ||||||||||||
Total (millions of unit cases) | 1,918.5 | 1,953.6 | 1,871.5 | |||||||||
Growth (%) | (1.8 | ) | 4.4 | 23.9 | ||||||||
(in percentages) | ||||||||||||
Unit Case Volume Mix by Category | ||||||||||||
Sparkling beverages | 73.2 | 73.1 | 73.0 | |||||||||
Water(3) | 21.3 | 21.2 | 21.4 | |||||||||
Still beverages | 5.5 | 5.7 | 5.6 | |||||||||
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Total | 100.0 | 100.0 | 100.0 | |||||||||
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(1) | Includes volume from the operations of Grupo Yoli from June 2013. |
(2) | Includes volume from the operations of Grupo Fomento Queretano from May 2012. |
(3) | Includes bulk water volumes. |
In 2014, multiple serving presentations represented 64.5% of total sparkling beverages sales volume in Mexico, a 170 basis points decrease compared to 2013; and 54.7% of total sparkling beverages sales volume in Central America, a 16 basis points decrease compared to 2013. Coca-Cola FEMSA’s strategy is to foster consumption of single serve presentations while maintaining multiple serving volumes. In 2014, returnable packaging, as a percentage of total sparkling beverage sales volume accounted for 37.9% in Mexico, a 290 basis points increase as compared to 2013; and 34.8% in Central America, a 1,160 basis points increase as compared to 2013.
In 2014, Coca-Cola FEMSA’s sparkling beverages volume as a percentage of total sales volume in its Mexico and Central America division increased marginally to 73.2% as compared with 2013.
Total sales volume in Coca-Cola FEMSA’s Mexico and Central America division (including Grupo Yoli) reached 1,918.5 million unit cases in 2014, a decrease of 1.8% compared to 1,953.6 million unit cases in 2013. The sales volume for Coca-Cola FEMSA’s sparkling beverage category decreased 1.6%, mainly driven by the impact of price increase to compensate the excise tax to sweetened beverages. Coca-Cola FEMSA’s bottled water portfolio, excluding bulk water, grew 4.2%, mainly driven by the performance of theCiel brand in Mexico. Coca-Cola FEMSA’s still beverage category decreased 5.5% mainly due to the performance of the Jugos del Valle portfolio in the division. Organically, excluding the non-comparable effect of Grupo Yoli in 2014, total sales volume for Mexico and Central America division reached 1,878.9 million unit cases in 2014, a decrease of 3.8% as compared to 2013. On the same basis, Coca-Cola FEMSA’s sparkling beverage category decreased 3.9%, its bottled water portfolio, excluding bulk water, remained flat, and its still beverage category decreased 7.1%.
In 2013, multiple serving presentations represented 66.2% of total sparkling beverages sales volume in Mexico (including Grupo Fomento Queretano and Grupo Yoli), a 10 basis points decrease compared to 2012; and 56.3% of total sparkling beverages sales volume in Central America, a 50 basis points increase compared to 2012. In 2013, returnable packaging, as a percentage of total sparkling beverage sales volume, accounted for 35.0% in Mexico (including Grupo Fomento Queretano and Grupo Yoli), a 160 basis points increase compared to 2012; and 23.2% in Central America, a 160 basis points decrease compared to 2012.
In 2013, Coca-Cola FEMSA’s sparkling beverages volume as a percentage of total sales volume in its Mexico and Central America division (including Grupo Fomento Queretano and Grupo Yoli) increased marginally to 73.1% as compared with 2012.
Total sales volume in Coca-Cola FEMSA’s Mexico and Central America division (including Grupo Fomento Queretano and Grupo Yoli) reached 1,953.6 million unit cases in 2013, an increase of 4.4% compared to 1,871.5 million unit cases in 2012. The integration of Grupo Fomento Queretano and Grupo Yoli in Mexico contributed 89.3 million unit cases in 2013 of which sparkling beverages were 72.2%, water was 9.9%, bulk water was 13.4% and still beverages were 4.5%. Excluding the integration of these territories, volume decreased 0.4% to 1,864.2 million unit cases. Organically, Coca-Cola FEMSA’s bottled water portfolio grew 5.1%, mainly driven by the performance of theCiel brand in Mexico. On the same basis, Coca-Cola FEMSA’s still beverage category grew 3.7% mainly due to the performance of the Jugos del Valle portfolio in the division. These increases partially compensated for the flat volumes in sparkling beverages and a 3.5% decline in the bulk water business.
South America (Excluding Venezuela). Coca-Cola FEMSA’s product portfolio in South America consists mainly ofCoca-Cola trademark beverages, including theJugos del Valle line of juice-based beverages in Colombia and Brazil, and theHeineken beer brands, includingKaiser beer brands, in Brazil, which we sell and distribute.
During 2013, as part of Coca-Cola FEMSA’s efforts to foster sparkling beverage per capita consumption in Brazil, it reinforced the 2.0-liter returnable plastic bottle for theCoca-Cola brand and introduced two single-serve 0.2 and 0.3 liter presentations. During 2014, in an effort to increase sales in its still beverage portfolio in the region, Coca-Cola FEMSA reinforced itsJugos del Valle line of business andPowerade brand. Per capita consumption of Coca-Cola FEMSA’s beverages in Colombia, Brazil and Argentina was 152.7, 244.2 and 470.4 eight-ounce servings, respectively, in 2014.
The following table highlights historical total sales volume and sales volume mix in South America (excluding Venezuela), not including beer:
Year Ended December 31, | ||||||||||||
2014 | 2013(1) | 2012 | ||||||||||
Total Sales Volume | ||||||||||||
Total (millions of unit cases) | 1,257.7 | 1,028.1 | 967.0 | |||||||||
Growth (%) | 22.6 | 6.3 | 2.0 | |||||||||
(in percentages) | ||||||||||||
Unit Case Volume Mix by Category | ||||||||||||
Sparkling beverages | 84.1 | 84.1 | 84.9 | |||||||||
Water(2) | 9.7 | 10.1 | 10.0 | |||||||||
Still beverages | 6.2 | 5.8 | 5.1 | |||||||||
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Total | 100.0 | 100.0 | 100.0 | |||||||||
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(1) | Includes volume from the operations of Companhia Fluminense from September 2013 and Spaipa from November 2013. |
(2) | Includes bulk water volume. |
Total sales volume in Coca-Cola FEMSA’s South America division, excluding Venezuela, increased 22.6% to 1,257.7 million unit cases in 2014 as compared to 2013, as a result of stronger sales volumes in its recently integrated territories in Brazil and better volume performance in Colombia. The still beverage category grew 31.8%, mainly driven by the Jugos del Valle line of business in Colombia and Brazil and the performance ofFUZE tea andLeão tea in the division. Coca-Cola FEMSA’s sparkling portfolio increased 22.6% mainly driven by the performance of theCoca-Cola brand and other core products in its operations. Coca-Cola FEMSA’s bottled water portfolio, including bulk water, increased 16.9% driven by performance of theBonaqua brand in Argentina and theCrystalbrand in Brazil. Organically, excluding the non-comparable effect of Companhia Fluminense and Spaipa in 2014, total sales volume in South America division excluding Venezuela, increased 3.7% as compared to 2013. On the same basis, Coca-Cola FEMSA’s still beverage category grew 15.3% mainly driven by the Jugos del Valle line of business in the region, its bottled water portfolio, including bulk water, increased 6.9% mainly driven by the performance of theCrystal brand in Brazil, and its sparkling beverage category increased 2.5%.
In 2014, returnable packaging, as a percentage of total sparkling beverage sales volume, accounted for 32.0% in Colombia, a decrease of 520 basis points as compared to 2013; 19.7% in Argentina, a decrease of 230 basis points and 15.5% in Brazil a 50 basis points decrease compared to 2013. In 2014, multiple serving presentations represented 69.8%, 85.3% and 75.0% of total sparkling beverages sales volume in Colombia, Argentina and Brazil, respectively.
Total sales volume in Coca-Cola FEMSA’s South America division, excluding Venezuela, increased 6.3% to 1,028.1 million unit cases in 2013 as compared to 2012, as a result of growth in Colombia and Argentina and the integration of Companhia Fluminense and Spaipa in its Brazilian territories. These effects compensated for an organic volume decline in Brazil. Organically, excluding the non-comparable effect of Companhia Fluminense and Spaipa, volumes remained flat as compared with the previous year. On the same basis, the still beverage category grew 14.3%, mainly driven by the Jugos del Valle line of business in Colombia and Brazil and the performance ofFUZE tea in the division. Coca-Cola FEMSA’s bottled water portfolio, including bulk water, increased 3.8% mainly driven by theBonaqua brand in Argentina and theBrisa brand in Colombia. These increases compensated for a 1.2% decline in the sparkling beverage portfolio.
In 2013, returnable packaging, as a percentage of total sparkling beverage sales volume, accounted for 37.2% in Colombia, a decrease of 320 basis points as compared to 2012; 22.0% in Argentina, a decrease of 690 basis points and 16.0% in Brazil, excluding the non-comparable effect of Companhia Fluminense and Spaipa, a 170 basis points increase compared to 2012. In 2013, multiple serving presentations represented 66.7%, 85.2% and 72.9% of total sparkling beverages sales volume in Colombia, Argentina and Brazil on an organic basis, respectively.
Coca-Cola FEMSA continues to distribute and sell theHeineken beer portfolio, includingKaiser beer brands, in its Brazilian territories through the 20-year term, consistent with the arrangements in place since 2006 with Cervejarias Kaiser, a subsidiary of the Heineken Group. Beginning in the second quarter of 2005, Coca-Cola FEMSA ceased including beer that it distributes in Brazil in its reported sales volumes.
Venezuela. Coca-Cola FEMSA’s product portfolio in Venezuela consists ofCoca-Cola trademark beverages. Per capita consumption of Coca-Cola FEMSA’s beverages in Venezuela during 2014 was 190.0 eight-ounce servings. At the end of 2011, Coca-Cola FEMSA launchedDel Valle Fresh, an orangeade, in Venezuela, which contributed significantly to incremental volume growth in this country during 2012. During 2014, Coca-Cola FEMSA’s Poweradebrand in the country contributed to its sales growth in the still beverage category.
The following table highlights historical total sales volume and sales volume mix in Venezuela:
Year Ended December 31, | ||||||||||||
2014 | 2013 | 2012 | ||||||||||
Total Sales Volume | ||||||||||||
Total (millions of unit cases) | 241.1 | 222.9 | 207.7 | |||||||||
Growth (%) | 8.2 | 7.3 | 9.4 | |||||||||
(in percentages) | ||||||||||||
Unit Case Volume Mix by Category | ||||||||||||
Sparkling beverages | 85.7 | 85.6 | 87.9 | |||||||||
Water(1) | 6.5 | 6.9 | 5.6 | |||||||||
Still beverages | 7.8 | 7.5 | 6.5 | |||||||||
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Total | 100.0 | 100.0 | 100.0 | |||||||||
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(1) | Includes bulk water volume. |
Coca-Cola FEMSA has implemented a product portfolio rationalization strategy that allows it to minimize the impact of certain operating disruptions that have been recurrent in Venezuela over the last several years related to difficulties in accessing raw materials due to the delay in obtaining the corresponding import authorizations. In addition, from time to time, Coca-Cola FEMSA experiences operating disruptions due to prolonged negotiations of collective bargaining agreements.
Despite these difficulties, total sales volume increased 8.2% to 241.1 million unit cases in 2014, as compared to 222.9 million unit cases in 2013. The sales volume in the sparkling beverage category grew 8.3%, driven by the strong performance of theCoca-Cola brand, which grew 15.3%. The bottled water business, including bulk water, grew 1.6% mainly driven by theNevada brand. The still beverage category increased 10.8%, due to the performance of theDel Valle Fresh orangeade andPoweradebrand.
In 2014, multiple serving presentations represented 81.9% of total sparkling beverages sales volume in Venezuela, a 100 basis points increase as compared to 2013. In 2014, returnable presentations represented 6.9% of total sparkling beverages sales volume in Venezuela, a 20 basis points increase as compared to 2013.
Total sales volume increased 7.3% to 222.9 million unit cases in 2013, as compared to 207.7 million unit cases in 2012. The sales volume in the sparkling beverage category grew 4.5%, driven by the strong performance of theCoca-Cola brand, which grew 10.0%. The bottled water business, including bulk water, grew 33.2% mainly driven by theNevada brand. The still beverage category increased 23.5%, due to the performance of theDel Valle Fresh orangeade andKapo.
In 2013, multiple serving presentations represented 80.9% of total sparkling beverages sales volume in Venezuela, a 100 basis points increase compared to 2012. In 2013, returnable presentations represented 6.8% of total sparkling beverages sales volume in Venezuela, an 80 basis points decrease compared to 2012.
Seasonality
Sales of Coca-Cola FEMSA’s products are seasonal, as its sales levels generally increase during the summer months of each country and during the Christmas holiday season. In Mexico, Central America, Colombia and Venezuela, Coca-Cola FEMSA typically achieves its highest sales during the summer months of April through September as well as during the Christmas holidays in December. In Brazil and Argentina, Coca-Cola FEMSA’s highest sales levels occur during the summer months of October through March and the Christmas holidays in December.
Marketing
Coca-Cola FEMSA, in conjunction with The Coca-Cola Company, has developed a marketing strategy to promote the sale and consumption of its products. Coca-Cola FEMSA relies extensively on advertising, sales promotions and retailer support programs to target the particular preferences of its consumers. Coca-Cola FEMSA’s consolidated marketing expenses in 2014, net of contributions by The Coca-Cola Company, were Ps. 3,488 million. The Coca-Cola Company contributed an additional Ps. 4,118 million in 2014, which mainly includes contributions for coolers, bottles and cases. Through the use of advanced information technology, Coca-Cola FEMSA has collected customer and consumer information that allow it to tailor its marketing strategies to target different types of customers located in each of its territories and to meet the specific needs of the various markets it serves.
Retailer Support Programs. Support programs include providing retailers with point-of-sale display materials and consumer sales promotions, such as contests, sweepstakes and the giveaway of product samples.
Coolers. Coolers play an integral role in Coca-Cola FEMSA’s clients’ plans for success. Increasing both cooler coverage and the number of cooler doors among its retailers is important to ensure that Coca-Cola FEMSA’s wide variety of products are properly displayed, while strengthening its merchandising capacity in the traditional sales channel to significantly improve its point-of-sale execution.
Advertising. Coca-Cola FEMSA advertises in all major communications media. Coca-Cola FEMSA focuses its advertising efforts on increasing brand recognition by consumers and improving its customer relations. National advertising campaigns are designed and proposed by The Coca-Cola Company’s local affiliates in the countries in which Coca-Cola FEMSA operates, with Coca-Cola FEMSA’s input at the local or regional level. Point-of-sale merchandising and advertising efforts are proposed and implemented by Coca-Cola FEMSA, with a focus on increasing its connection with customers and consumers.
Channel Marketing. In order to provide more dynamic and specialized marketing of its products, Coca-Cola FEMSA’s strategy is to classify its markets and develop targeted efforts for each consumer segment or distribution channel. Coca-Cola FEMSA’s principal channels are small retailers, “on-premise” consumption such as restaurants and bars, supermarkets and third party distributors. Presence in these channels entails a comprehensive and detailed analysis of the purchasing patterns and preferences of various groups of beverage consumers in each of the different types of locations or distribution channels. In response to this analysis, Coca-Cola FEMSA tailors its product, price, packaging and distribution strategies to meet the particular needs of and exploit the potential of each channel.
Multi-Segmentation. Coca-Cola FEMSA has implemented a multi-segmentation strategy in all of its markets. These strategies consist of the implementation of different product/price/package portfolios by market cluster or group. These clusters are defined based on consumption occasion, competitive intensity and socio-economic levels, rather than solely on the types of distribution channels.
Client Value Management. Coca-Cola FEMSA continues transforming its commercial models to focus on its customers’ value potential using a value-based segmentation approach to capture the industry’s potential. Coca-Cola FEMSA started the rollout of this new model in its Mexico, Central America, Colombia and Brazil operations in 2009. As of the end of 2014, Coca-Cola FEMSA has covered the totality of the volumes in every operation except for Venezuela (where Coca-Cola FEMSA has partially covered the volumes) and the recently integrated franchises of Companhia Fluminense and Spaipa in Brazil.
Coca-Cola FEMSA believes that the implementation of these strategies described above also enables it to respond to competitive initiatives with channel-specific responses as opposed to market-wide responses. In addition, it allows Coca-Cola FEMSA to be more efficient in the way it goes to market and invests its marketing resources in those segments that could provide a higher return. Coca-Cola FEMSA’s marketing, segmentation and distribution activities are facilitated by its management information systems. Coca-Cola FEMSA has invested significantly in creating these systems, including in hand-held computers to support the gathering of product, consumer and delivery information for most of the sales routes throughout its territories.
Product Sales and Distribution
The following table provides an overview of Coca-Cola FEMSA’s distribution centers and the retailers to which it sells its products:
As of December 31, 2014 | ||||||||||||
Mexico and Central America(1) | South America(2) | Venezuela | ||||||||||
Distribution centers | 176 | 66 | 33 | |||||||||
Retailers(3) | 955,383 | 814,864 | 181,605 |
(1) | Includes Mexico, Guatemala, Nicaragua, Costa Rica and Panama. |
(2) | Includes Colombia, Brazil and Argentina. |
(3) | Estimated. |
Coca-Cola FEMSA continuously evaluates its distribution model in order to fit with the local dynamics of the marketplace and analyze the way it goes to market, recognizing different service needs from its customers, while looking for a more efficient distribution model. As part of this strategy, Coca-Cola FEMSA is rolling out a variety of new distribution models throughout its territories looking for improvements in its distribution network.
Coca-Cola FEMSA uses several sales and distribution models depending on market, geographic conditions and the customer’s profile: (1) the pre-sale system, which separates the sales and delivery functions, permitting trucks to be loaded with the mix of products that retailers have previously ordered, thereby increasing both sales and distribution efficiency, (2) the conventional truck route system, in which the person in charge of the delivery makes immediate sales from inventory available on the truck, (3) a hybrid distribution system, where the same truck carries product available for immediate sale and product previously ordered through the pre-sale system, (4) the telemarketing system, which could be combined with pre-sales visits and (5) sales through third-party wholesalers of Coca-Cola FEMSA’s products.
As part of the pre-sale system, sales personnel also provide merchandising services during retailer visits, which Coca-Cola FEMSA believes enhance the shopper experience at the point of sale. Coca-Cola FEMSA believes that an adequate number of service visits to retailers and frequency of deliveries are essential elements in an effective selling and distribution system for its products.
Coca-Cola FEMSA’s distribution centers range from large warehousing facilities and re-loading centers to small deposit centers. In addition to Coca-Cola FEMSA’s fleet of trucks, Coca-Cola FEMSA distributes its products in certain locations through electric carts and hand-trucks in order to comply with local environmental and traffic regulations. In some of Coca-Cola FEMSA’s territories, it retains third parties to transport its finished products from the bottling plants to the distribution centers.
Mexico. Coca-Cola FEMSA contracts with one of our subsidiaries for the transportation of finished products to its distribution centers from its production facilities. From the distribution centers, Coca-Cola FEMSA then distributes its finished products to retailers through its own fleet of trucks.
In Mexico, Coca-Cola FEMSA sells a majority of its beverages at small retail stores to consumers who may take the beverages for consumption at home or elsewhere. Coca-Cola FEMSA also sells products through the “on-premise” consumption segment, supermarkets and other locations. The “on-premise” consumption segment consists of sales through sidewalk stands, restaurants, bars and various types of dispensing machines as well as sales through point-of-sale programs in stadiums, concert halls, auditoriums and theaters.
Brazil. In Brazil, Coca-Cola FEMSA sold 33% of its total sales volume through modern distribution channels in 2014. Also in Brazil, Coca-Cola FEMSA distributes its finished products to retailers through a combination of its own fleet of trucks and third party distributors, while Coca-Cola FEMSA maintains control over the selling function. In designated zones in Brazil, third-party distributors purchase its products at a discount from the wholesale price and resell the products to retailers.
Territories other than Mexico and Brazil. Coca-Cola FEMSA distributes its finished products to retailers through a combination of its own fleet of trucks and third party distributors. In most of Coca-Cola FEMSA’s territories, an important part of its total sales volume is sold through small retailers, with low supermarket penetration.
Competition
Although Coca-Cola FEMSA believes that its products enjoy wider recognition and greater consumer loyalty than those of its principal competitors, the markets in the territories in which Coca-Cola FEMSA operates are highly competitive. Coca-Cola FEMSA’s principal competitors are localPepsi bottlers and other bottlers and distributors of national and regional beverage brands. Coca-Cola FEMSA faces increased competition in many of its territories from producers of low price beverages, commonly referred to as “B brands.” A number of Coca-Cola FEMSA’s competitors in Central America, Venezuela, Brazil and Argentina offer beer in addition to sparkling beverages, still beverages, and water, which may enable them to achieve distribution efficiencies.
Price discounting and packaging have joined consumer sales promotions, customer service and non-price retailer incentives as the primary means of competition among bottlers. Coca-Cola FEMSA competes by seeking to offer products at an attractive price in the different segments in its markets and by building on the value of its brands. Coca-Cola FEMSA believes that the introduction of new products and new presentations has been a significant competitive technique that allows it to increase demand for its products, provide different options to consumers and increase new consumption opportunities.See “—Product and Packaging Mix.”
Mexico and Central America. Coca-Cola FEMSA’s principal competitors in Mexico are bottlers ofPepsi products, whose territories overlap but are not co-extensive with its own. Coca-Cola FEMSA competes with Organización Cultiba, S.A.B. de C.V., a joint venture formed by Grupo Embotelladoras Unidas, S.A.B. de C.V., the formerPepsi bottler in central and southeast Mexico, a subsidiary of PepsiCo, and Empresas Polar, S.A., the leading beer distributor andPepsi bottler in Venezuela. Coca-Cola FEMSA’s main competition in the juice category in Mexico is Grupo Jumex. In the water category,Bonafont, a water brand owned by Grupo Danone, is Coca-Cola FEMSA’s main competition. In addition, Coca-Cola FEMSA competes with Cadbury Schweppes in sparkling beverages and with other national and regional brands in its Mexican territories, as well as “B brand” producers, such as Ajemex, S.A. de C.V. and Consorcio AGA, S.A. de C.V., that offer various presentations of sparkling and still beverages.
In the countries that comprise Coca-Cola FEMSA’s Central America region, its main competitors arePepsi andBig Cola bottlers. In Guatemala and Nicaragua, Coca-Cola FEMSA competes with a joint venture between AmBev and The Central American Bottler Corporation. In Costa Rica, Coca-Cola FEMSA’s principal competitor is Florida Bebidas S.A., subsidiary of Florida Ice and Farm Co. In Panama, Coca-Cola FEMSA’s main competitor is Cervecería Nacional, S.A. Coca-Cola FEMSA also faces competition from “B brands” offering multiple serving size presentations in some Central American countries.
South America (excluding Venezuela). Coca-Cola FEMSA’s principal competitor in Colombia is Postobón, a well-established local bottler that sells flavored sparkling beverages (under the brandsPostobón andColombiana), some of which have a wide consumption preference, such asmanzana Postobón (apple Postobón), which is the second most popular flavor in the Colombian sparkling beverage industry in terms of total sales volume. Postobón also sellsPepsi products. Postobón is a vertically integrated producer, the owners of which hold other significant commercial interests in Colombia. Coca-Cola FEMSA also competes with low-price producers, such as the producers ofBig Cola, which principally offer multiple serving size presentations in the sparkling and still beverage industry.
In Brazil, Coca-Cola FEMSA competes against AmBev, a Brazilian company with a portfolio of brands that includesPepsi, local brands with flavors such as guaraná, and proprietary beer brands. Coca-Cola FEMSA also competes against “B brands” or “Tubainas,” which are small, local producers of low-cost flavored sparkling beverages that represent a significant portion of the sparkling beverage market.
In Argentina, Coca-Cola FEMSA’s main competitor is Buenos Aires Embotellador S.A., or BAESA, aPepsi bottler, which is owned by Argentina’s principal brewery, Quilmes Industrial S.A., and indirectly controlled by AmBev. In addition, Coca-Cola FEMSA competes with a number of competitors offering generic, low-priced sparkling beverages as well as many other generic products and private label proprietary supermarket brands.
Venezuela. In Venezuela, Coca-Cola FEMSA’s main competitor is Pepsi-Cola Venezuela, C.A., a joint venture formed between PepsiCo and Empresas Polar, S.A., the leading beer distributor in the country. Coca-Cola FEMSA also competes with the producers ofBig Cola in part of this country.
Raw Materials
Pursuant to its bottler agreements, Coca-Cola FEMSA is authorized to manufacture, sell and distributeCoca-Cola trademark beverages within specific geographic areas, and Coca-Cola FEMSA is required to purchase in all of its territories for allCoca-Cola trademark beverages concentrate from companies designated by The Coca-Cola Company and sweeteners from companies authorized by The Coca-Cola Company. Concentrate prices forCoca-Cola trademark beverages are determined as a percentage of the weighted average retail price in local currency net of applicable taxes. Although The Coca-Cola Company has the right to unilaterally set the price of concentrates, in practice this percentage has historically been set pursuant to periodic negotiations with The Coca-Cola Company.
In the past, The Coca-Cola Company has increased concentrate prices forCoca-Cola trademark beverages in some of the countries in which Coca-Cola FEMSA operates. In 2014, The Coca-Cola Company informed Coca-Cola FEMSA that it will gradually increase concentrate prices for certainCoca-Cola trademark beverages over a five year period in Costa Rica and Panama beginning in 2014. Based on Coca-Cola FEMSA’s estimates, it currently does not expect these increases to have a material adverse effect on its results of operation. Most recently, The Coca-Cola Company also informed Coca-Cola FEMSA that it will gradually increase concentrate prices for flavored water over a four year period in Mexico beginning in April 2015. The Coca-Cola Company may unilaterally increase concentrate prices again in the future and Coca-Cola FEMSA may not be successful in negotiating or implementing measures to mitigate the negative effect this may have in the prices of its products or its results.See “Item 10. Additional Information—Material Contracts—Material Contracts Relating to Coca-Cola FEMSA—Cooperation Framework with The Coca-Cola Company.”
In addition to concentrate, Coca-Cola FEMSA purchases sweeteners, carbon dioxide, resin and preforms to make plastic bottles, finished plastic and glass bottles, cans, caps and fountain containers, as well as other packaging materials and raw materials. Sweeteners are combined with water to produce basic syrup, which is added to the concentrate as the sweetener for most of Coca-Cola FEMSA’s beverages. Coca-Cola FEMSA’s bottler agreements provide that, with respect toCoca-Colatrademark beverages, these materials may be purchased only from suppliers approved by The Coca-Cola Company, including certain of our affiliates. Prices for packaging materials and HFCS historically have been determined with reference to the U.S. dollar, although the local currency equivalent in a particular country is subject to price volatility in accordance with changes in exchange rates. Coca-Cola FEMSA’s most significant packaging raw material costs arise from the purchase of resin, plastic preforms to make plastic bottles and finished plastic bottles, which Coca-Cola FEMSA obtains from international and local producers. The prices of these materials are related to crude oil prices and global resin supply. In recent years Coca-Cola FEMSA has experienced volatility in the prices we pay for these materials. Across its territories, Coca-Cola FEMSA’s average price for resin in U.S. dollars decreased 4.6% in 2014 as compared to 2013.
Under Coca-Cola FEMSA’s agreements with The Coca-Cola Company, it may use raw or refined sugar or HFCS as sweeteners in its products. Sugar prices in all of the countries in which Coca-Cola FEMSA operates, other than Brazil, are subject to local regulations and other barriers to market entry that cause Coca-Cola FEMSA to pay in excess of international market prices for sugar. See “Item 4. Information on the Company—Coca-Cola FEMSA—Raw Materials.” We cannot assure you thatsugar in certain countries. In recent years, international sugar prices experienced significant volatility. Across Coca-Cola FEMSA’s territories, its average price for sugar in U.S. dollars decreased approximately 1.7% in 2014 as compared to 2013.
Coca-Cola FEMSA categorizes water as a raw material prices will not further increase in the future. Increases in the prices of raw materials would increase Coca-Cola FEMSA’s cost of goods sold and adversely affect its financial performance.
Taxes could adversely affect Coca-Cola FEMSA’s business.
The countries in which Coca-Cola FEMSA operates may adopt new tax laws or modify existing law to increase taxes applicable to its business. For example, in Mexico, a general tax reform became effective on January 1, 2010, pursuant to which, as applicable to Coca-Cola FEMSA, there is a temporary increase in the income tax rate from 28% to 30% from 2010 through 2012. This increase will be followed by a reduction to 29% for the year 2013 and a further reduction in 2014 to return to the previous rate of 28%. In addition, the value added tax (VAT) rate increased in 2010 from 15% to 16%. This increase had an impact on Coca-Cola FEMSA’s results from operations due to the reduction in disposable income of consumers.
In Panama, there was an increase in a certain consumer tax, effective as of April 1, 2010, affecting syrups, powders and concentrate. Some of these materials are usedobtains water for the production of some of its natural spring water products, such asManantialin Colombia andCrystal in Brazil, from spring water pursuant to concessions granted.
None of the materials or supplies that Coca-Cola FEMSA uses is presently in short supply, although the supply of specific materials could be adversely affected by strikes, weather conditions, governmental controls, national emergency situations, water shortages or the failure to maintain its existing water concessions.
Mexico and Central America. In Mexico, Coca-Cola FEMSA purchases its returnable plastic bottles from Graham Packaging México, S.A. de C.V., known as Graham, which is the exclusive supplier of returnable plastic bottles for The Coca-Cola Company and its bottlers in Mexico. Coca-Cola FEMSA mainly purchases resin from Indorama Ventures Polymers México, S. de R.L. de C.V. (formerly Arteva Specialties, S. de R.L. de C.V.), M. & G. Polímeros México, S.A. de C.V. and DAK Resinas Americas Mexico, S.A. de C.V., which Alpla México, S.A. de C.V., known as Alpla, and Envases Universales de México, S.A.P.I. de C.V. manufacture into non-returnable plastic bottles for Coca-Cola FEMSA.
Coca-Cola FEMSA purchases all its cans from Fábricas de Monterrey, S.A. de C.V. and Envases Universales de México, S.A.P.I. de C.V., through Promotora Mexicana de Embotelladoras, S.A. de C.V., known as PROMESA, a cooperative ofCoca-Cola bottlers, in which, as of April 10, 2015, Coca-Cola FEMSA held a 35.0% equity interest. Coca-Cola FEMSA mainly purchases its glass bottles from EXCO Integral Services, S.A. de C.V. (formerly Compañía Vidriera, S.A. de C.V.), FEVISA Industrial, S.A. de C.V., and Glass & Silice, S.A. de C.V.
Coca-Cola FEMSA purchases sugar from, among other suppliers, PIASA and Beta San Miguel, S.A. de C.V., both sugar cane producers in which, as of April 10, 2015, Coca-Cola FEMSA held a 36.3% and 2.7% equity interest, respectively. Coca-Cola FEMSA purchases HFCS from Ingredion México, S.A. de C.V., Almidones Mexicanos, S.A. de C.V. and Cargill de México, S.A. de C.V.
Sugar prices in Mexico are subject to local regulations and other barriers to market entry that cause Coca-Cola FEMSA to pay higher prices than those paid in the international market. As a result, prices in Mexico have no correlation to international market prices. In 2014, sugar prices in Mexico decreased approximately 7.0% as compared to 2013.
In Central America, the majority of Coca-Cola FEMSA’s sparkling beverages. These taxes increasedraw materials such as glass and plastic bottles are purchased from 6% to 10%.several local suppliers. Coca-Cola FEMSA purchases all of its cans from PROMESA. Sugar is available from suppliers that represent several local producers. In Costa Rica, Coca-Cola FEMSA acquires plastic non-returnable bottles from Alpla C.R. S.A., and in Nicaragua Coca-Cola FEMSA acquires such plastic bottles from Alpla Nicaragua, S.A.
South America (excluding Venezuela). In Colombia, Coca-Cola FEMSA uses sugar as a sweetener in most of its products, which it buys from several domestic sources. Coca-Cola FEMSA purchases plastic bottles from Amcor Rigid Plastics de Colombia, S.A. and Tapón Corona de Colombia S.A. Coca-Cola FEMSA has historically purchased all of its glass bottles from Peldar O-I; however, it has engaged new suppliers and has recently acquired glass bottles from Al Tajir and Frigoglass in both cases from the United Arab Emirates. Coca-Cola FEMSA purchases all of its cans from Crown Colombiana, S.A., which are only available through this local supplier. Grupo Ardila Lulle, owners of Coca-Cola FEMSA’s products are also subjectcompetitor Postobón, own a minority equity interest in Peldar O-I and Crown Colombiana, S.A.
Sugar is available in Brazil at local market prices, which historically have been similar to certain taxesinternational prices. Sugar prices in many of the countriesBrazil decreased approximately 4.1% as compared to 2013.See “Item 11. Quantitative and Qualitative Disclosures about Market Risk—Commodity Price Risk.” Coca-Cola FEMSA purchases glass bottles, plastic bottles and cans from several domestic and international suppliers.
In Argentina, Coca-Cola FEMSA mainly uses HFCS that it purchases from several different local suppliers as a sweetener in which it operates. Certain countries in Central America,its products. Coca-Cola FEMSA purchases glass bottles, plastic cases and other raw materials from several domestic sources. Coca-Cola FEMSA purchases plastic preforms, as well as returnable plastic bottles, at competitive prices from Andina Empaques S.A., a local subsidiary of Embotelladora Andina S.A., a Coca-Cola bottler with operations in Chile, Argentina, Brazil and Argentina also impose taxes on sparkling beverages. See “Item 4. Information on the Company—Regulatory Matters—Taxation of Sparkling Beverages.” We cannot assure you that any governmental authority in any country whereParaguay, and other local suppliers. Coca-Cola FEMSA operates will not impose new taxes or increase taxes on its products in the future. The imposition of new taxes or increases in taxes on Coca-Cola FEMSA’s products may have a material adverse effect on Coca-Cola FEMSA’s business, financial condition, prospectsalso acquires plastic preforms from Alpla Avellaneda, S.A. and results from operations.other suppliers.
Regulatory developments may adversely affect Coca-Cola FEMSA’s business.Venezuela
. In Venezuela, Coca-Cola FEMSA is subjectuses sugar as a sweetener in most of its products, which it purchase mainly from the local market. Since 2003, from time to regulation in eachtime, Coca-Cola FEMSA has experienced a sugar shortage due to lower domestic production and the inability of the territoriespredominant sugar importers to obtain permission to import in which it operates. The principal areas in whicha timely manner. While sugar distribution to the food and beverages industry and to retailers is controlled by the government, Coca-Cola FEMSA is subjectdid not experience any disruptions during 2014 with respect to regulation are environment, labor, taxation, health and antitrust. Regulation can also affect Coca-Cola FEMSA’s abilityaccess to set prices for its products. See “Item 4. Information of the Company—Regulatory Matters.” The adoption of new laws or regulations or a stricter interpretation or enforcement thereof in the countries in which Coca-Cola FEMSA operates may increase its operating costs or impose restrictions on its operations, which, in turn, may adversely affect its financial condition, business and results from operations. In particular, environmental standards are continually becoming more stringent in several of the countries in which Coca-Cola FEMSA operates, and Coca-Cola FEMSA is also continually in the process of keeping up and complying with these standards, althoughsufficient sugar supply.
However, we cannot assure you that Coca-Cola FEMSA will not experience disruptions in its ability to meet its sugar requirements in the future should the Venezuelan government impose restrictive measures. Coca-Cola FEMSA buys glass bottles from one local supplier, Productos de Vidrio, S.A., the only supplier authorized by The Coca-Cola Company. Coca-Cola FEMSA acquires most of its plastic non-returnable bottles from Alpla de Venezuela, S.A. and most of its aluminum cans from a local producer, Dominguez Continental, C.A.
Under current regulations promulgated by the Venezuelan authorities, Coca-Cola FEMSA’s ability and that of its suppliers to import some of the raw materials and other supplies used in its production could be limited, and access to the official exchange rate for these items, including, among others, concentrate, resin, aluminum, plastic caps, distribution trucks and vehicles is only achieved by obtaining proper approvals from the relevant authorities.
Overview and Background
FEMSA Comercio operates the largest chain of small-format stores in Mexico, measured in terms of number of stores as of December 31, 2014, mainly under the trade name OXXO. As of December 31, 2014, FEMSA Comercio operated 12,853 OXXO stores, of which 12,812 are located throughout the country, with a particularly strong presence in the northern part of Mexico, and the remaining 41 stores are located in Bogotá, Colombia.
FEMSA Comercio was established by FEMSA in 1978 when two OXXO stores were opened in Monterrey, one store in Mexico City and another store in Guadalajara. The motivating factor behind FEMSA’s entrance into the retail industry was to enhance beer sales through company-owned retail outlets as well as to gather information on customer preferences. In 2014, a typical OXXO store carried 2,744 different store keeping units (SKUs) in 31 main product categories.
In recent years, FEMSA Comercio has represented an effective distribution channel for our beverage products, as well as a rapidly growing point of contact with our consumers. Based on the belief that location plays a major role in the long-term success of a retail operation such as a small-format store, as well as a role in our continually improving ability to accelerate and streamline the new-store development process, FEMSA Comercio has focused on a strategy of rapid, profitable growth. FEMSA Comercio opened 1,040, 1,120 and 1,132 net new OXXO stores in 2012, 2013 and 2014, respectively. The accelerated expansion in the number of OXXO stores yielded total revenue growth of 12.4% to reach Ps. 109,624 million in 2014. OXXO same-store sales increased an average of 2.7%, driven by an increased average customer ticket without any change in same-store traffic. FEMSA Comercio performed approximately 3.4 billion transactions in 2014 compared to 3.2 billion transactions in 2013.
Business Strategy
A fundamental element of FEMSA Comercio’s business strategy is to utilize its position in the small-format store market to grow in a cost-effective and profitable manner. As a market leader in small-format store retailing, based on internal company surveys, management believes that FEMSA Comercio has an in-depth understanding of its markets and significant expertise in operating a national store chain. FEMSA Comercio intends to continue increasing its store base while capitalizing on the market knowledge gained at existing stores.
FEMSA Comercio has developed proprietary models to assist in identifying appropriate store locations, store formats and product categories. Its model utilizes location-specific demographic data and FEMSA Comercio’s experience in similar locations to fine tune the store format and product offerings to the target market. Market segmentation is becoming an important strategic tool, and it should increasingly allow FEMSA Comercio to improve the operating efficiency of each location and the overall profitability of the chain.
FEMSA Comercio has made and will continue to make significant investments in IT to improve its ability to capture customer information from its existing OXXO stores and to improve its overall operating performance. The majority of products carried through OXXO stores are bar-coded, and all OXXO stores are equipped with point-of-sale systems that are integrated into a company-wide computer network. To implement revenue management strategies, FEMSA Comercio created a division in charge of product category management for products, such as beverages, fast food and perishables, to enhance and better utilize its consumer information base and market intelligence capabilities.
FEMSA Comercio utilizes a technology platform supported by an enterprise resource planning (ERP) system, as well as other technological solutions such as merchandising and point-of-sale systems, which will allow FEMSA Comercio to continue redesigning its key operating processes and enhance the usefulness of its market information going forward. In addition, FEMSA Comercio has expanded its operations by opening 3 new OXXO stores in Bogotá, Colombia in 2014.
FEMSA Comercio has adopted innovative promotional strategies in order to increase store traffic and sales. In particular, FEMSA Comercio sells high-frequency items such as beverages, snacks and cigarettes at competitive prices. FEMSA Comercio’s ability to implement this strategy profitably is partly attributable to the size of the OXXO stores chain, as FEMSA Comercio is able to meetwork together with its suppliers to implement their revenue-management strategies through differentiated promotions. OXXO stores’ national and local marketing and promotional strategies are an effective revenue driver and a means of reaching new segments of the timelines for compliancepopulation while strengthening the OXXO brand. For example, the organization has refined its expertise in executing cross promotions (discounts on multi-packs or sales of complementary products at a special price) and targeted promotions to attract new customer segments, such as housewives, by expanding the offerings in the grocery product category in certain stores. FEMSA Comercio is also strengthening its capabilities to increasingly provide consumers with services such as utility bill payment and other basic transactions.
Store Locations
With 12,812 OXXO stores in Mexico and 41 OXXO stores in Colombia as of December 31, 2014, FEMSA Comercio operates the largest small-format store chain in Latin America measured by number of stores. OXXO stores are concentrated in the northern part of Mexico, but also have a growing presence in the rest of the country.
OXXO Stores
Regional Allocation in Mexico and Latin America(*)
as of December 31, 2014
FEMSA Comercio has aggressively expanded its number of OXXO stores over the past several years. The average investment required to open a new OXXO store varies, depending on location and format and whether the store is opened in an existing retail location or requires construction of a new store. FEMSA Comercio is generally able to use supplier credit to fund the initial inventory of new OXXO stores.
OXXO Stores
Total Growth
Year Ended December 31, | ||||||||||||||||||||
2014 | 2013 | 2012 | 2011 | 2010 | ||||||||||||||||
Total OXXO stores | 12,853 | 11,721 | 10,601 | 9,561 | 8,426 | |||||||||||||||
Store growth (% change over previous year) | 9.7 | % | 10.6 | % | 10.9 | % | 13.5 | % | 14.9 | % |
FEMSA Comercio currently expects to continue the OXXO stores growth trend established over the past several years by emphasizing growth in areas of high economic potential in existing markets and by expanding in underserved and unexploited markets. Management believes that the southeast part of Mexico is particularly underserved by the relevant regulatory authorities. See “Item 4. Informationsmall-format store industry.
The identification of locations and pre-opening planning in order to optimize the results of new OXXO stores are important elements in FEMSA Comercio’s growth plan. FEMSA Comercio continuously reviews store performance against certain operating and financial benchmarks to optimize the overall performance of the chain. OXXO stores unable to maintain benchmark standards are generally closed. Between December 31, 2010 and 2014, the total number of OXXO stores increased by 4,427, which resulted from the opening of 4,573 new stores and the closing of 146 existing stores.
Competition
FEMSA Comercio, mainly through OXXO stores, competes in the overall retail market, which we believe is highly competitive. OXXO stores face competition from small-format stores like 7-Eleven, Super Extra, Super City, Círculo K stores and other numerous chains of retailers across Mexico, from other regional small-format retailers to small informal neighborhood stores. OXXO competes both for consumers and for new locations for stores and the managers to operate those stores. FEMSA Comercio operates in the 32 Mexican states and has much broader geographical coverage than any of its competitors in Mexico.
Market and Store Characteristics
Market Characteristics
FEMSA Comercio is placing increased emphasis on market segmentation and differentiation of store formats to more appropriately serve the needs of customers on a location-by-location basis. The principal segments include residential neighborhoods, commercial and office locations and stores near schools and universities, along with other types of specialized locations.
Approximately 64.3% of OXXO stores’ customers are between the ages of 15 and 35. FEMSA Comercio also segments the market according to demographic criteria, including income level.
OXXO Store Characteristics
The average size of an OXXO store is approximately 104 square meters of selling space, excluding space dedicated to refrigeration, storage or parking. The average constructed area of a store is approximately 187 square meters and, when parking areas are included, the average store size is approximately 421 square meters.
FEMSA Comercio—Operating Indicators
Year Ended December 31, | ||||||||||||||||||||
2014 | 2013 | 2012 | 2011 | 2010 | ||||||||||||||||
(percentage increase compared to previous year) | ||||||||||||||||||||
Total FEMSA Comercio revenues | 12.4 | % | 12.9 | % | 16.6 | % | 19.0 | % | 16.3 | % | ||||||||||
OXXO same-store sales(1) | 2.7 | % | 2.4 | % | 7.7 | % | 9.2 | % | 5.2 | % |
(1) | Same-store sales growth is calculated by comparing the sales of stores for each year that have been in operation for more than 12 months with the sales of those same stores during the previous year. |
Beer, cigarettes, soft drinks and other beverages and snacks represent the main product categories for OXXO stores. FEMSA Comercio has a distribution agreement with Cuauhtémoc Moctezuma (which is now part of the Heineken Group). As a result of this agreement, OXXO stores only carry beer brands produced and distributed by Cuauhtémoc Moctezuma. OXXO stores will continue to benefit from the existing relationship under which Cuauhtémoc Moctezuma will continue to be the exclusive supplier of beer to OXXO until June 2020.
Approximately 59% of OXXO stores are operated by independent managers responsible for all aspects of store operations. The managers are commission agents and are not employees of FEMSA Comercio. Each store manager is the legal employer of the store’s staff, which typically numbers six people per store. FEMSA Comercio continually invests in on-site operating personnel, with the objective of promoting loyalty, customer service and low personnel turnover in the stores.
Advertising and Promotion
FEMSA Comercio’s marketing efforts for OXXO stores include both specific product promotions and image advertising campaigns. These strategies seek to increase store traffic and sales, and to reinforce the OXXO name and market position.
FEMSA Comercio manages its advertising for OXXO stores on three levels depending on the Company—Regulatory Matters—Environmental Matters.” Furthernature and scope of the specific campaign: local or store-specific, regional and national. Store-specific and regional campaigns are closely monitored to ensure consistency with the overall corporate image of OXXO stores and to avoid conflicts with national campaigns. FEMSA Comercio primarily uses point of purchase materials, flyers, handbills and print and radio media for promotional campaigns, although television is used occasionally for the introduction of new products and services. The OXXO store chain’s image and brand name are presented consistently across all stores, irrespective of location.
Inventory and Purchasing
FEMSA Comercio has placed considerable emphasis on improving operating performance. As part of these efforts, FEMSA Comercio continues to invest in extensive information management systems to improve inventory management. Electronic data collection has enabled FEMSA Comercio to reduce average inventory levels. Inventory replenishment decisions are carried out on a store-by-store basis.
Management believes that the OXXO store chain’s scale of operations provides FEMSA Comercio with a competitive advantage in its ability to realize strategic alliances with suppliers. General category offerings are determined on a national level, although purchasing decisions are implemented on a local, regional or national level, depending on the nature of the product category. Given the fragmented nature of the retail industry in Mexico in general, Mexican producers of beer, soft drinks, bread, dairy products, snacks, cigarettes and other high-frequency products have established proprietary distribution systems with extensive direct distribution routes. As a result, approximately 53% of the OXXO store chain’s total sales consist of products that are delivered directly to the stores by suppliers. Other products with longer shelf lives are distributed to stores by FEMSA Comercio’s distribution system, which includes 16 regional warehouses located in Monterrey, Guadalajara, Mexicali, Mérida, León, Obregón, Puebla, Queretaro, Chihuahua, Reynosa, Saltillo, Tijuana, Toluca, Villahermosa and two in Mexico City. The distribution centers operate a fleet of approximately 792 trucks that make deliveries to each store approximately twice per week.
Seasonality
OXXO stores experience periods of high demand in December, as a result of the holidays, and in July and August, as a result of increased consumption of beer and soft drinks during the hot summer months. The months of November and February are generally the weakest sales months for OXXO stores. In general, colder weather during these months reduces store traffic and consumption of cold beverages.
Entry into Drugstore Market
During 2013, FEMSA Comercio entered the drugstore market in Mexico through two transactions. FEMSA Comercio through CCF, closed the acquisition of Farmacias YZA, a leading drugstore operator in Southeast Mexico, headquartered in Merida, Yucatan. The founding shareholders of Farmacias YZA hold a 25% stake in CCF. Following this transaction, on May 13, 2013, CCF acquired Farmacias Moderna, a leading drugstore operator in the western state of Sinaloa.
In December 2014, FEMSA Comercio through CCF agreed to acquire 100% of Farmacias Farmacón, a a regional pharmacy chain consisting of 213 stores in the northwestern Mexican states of Sinaloa, Sonora, Baja California and Baja California Sur. With this transaction, FEMSA Comercio will reach a total of approximately 803 pharmacy stores. The transaction is pending customary regulatory approvals, and is expected to close during the second quarter of 2015.
The rationale for entering this new market is anchored on our belief that FEMSA Comercio has developed certain capabilities and skills that should be applicable and useful in the operation of other small retail formats. These capabilities include site selection, logistics, business processes, human resources, inventory and supplier management. The drugstore market in Mexico is very fragmented and FEMSA Comercio believes it is well equipped to create value by entering this market and pursuing a growth strategy that maximizes the opportunity.
Entry into Quick Service Restaurant Market
Following the same rationale that its capabilities and skills are well suited to different types of small-format retail, during 2013 FEMSA Comercio also entered the quick service restaurant market in Mexico through the 80% acquisition of Doña Tota. This is a leading regional chain specializing in Mexican food with a particularly strong presence in the northeast of the country. This acquisition presented FEMSA Comercio with the opportunity to grow Doña Tota’s stand-alone store base across the country, while also offering the benefit of advancing FEMSA Comercio’s prepared food capabilities and expertise.
Gas Station Market
Since 1995, FEMSA Comercio has been providing services and assets for the operation of gasoline service stations through agreements with third parties that own Petroleos Mexicanos (PEMEX) franchises, using the commercial brand OXXO Gas. As of December 31, 2014 there were 227 OXXO Gas stations, most of them adjacent to OXXO stores.
Mexican legislation has historically precluded FEMSA Comercio from participating in the retail sale of gasoline and therefore precluded ownership of PEMEX franchises, given our foreign institutional investor base. In response to recent changes in current regulations maythis legislation, FEMSA Comercio has agreed to acquire the related PEMEX franchises from the aforementioned third parties and plans to lease, acquire or open more gasoline service stations in the future.
Other Stores
FEMSA Comercio also operates other small-format stores, which include soft discount stores with a focus on perishables and liquor stores.
Equity Investment in the Heineken Group
As of December 31, 2014, FEMSA owned a non-controlling interest in the Heineken Group, one of the world’s leading brewers. As of December 31, 2014, our 20% economic interest in the Heineken Group was comprised of 43,018,320 shares of Heineken Holding N.V. and 72,182,203 shares of Heineken N.V. For 2014, FEMSA recognized equity income of Ps. 5,244 million regarding its 20% economic interest in the Heineken Group; see Note 10 to our audited consolidated financial statements.
As described above, FEMSA Comercio has a distribution agreement with Cuauhtémoc Moctezuma (which is now a part of the Heineken Group) pursuant to which OXXO stores only carry beer brands produced and distributed by Cuauhtémoc Moctezuma. OXXO stores will continue to benefit from the existing relationship under which Cuauhtémoc Moctezuma will continue to be the exclusive supplier of beer to OXXO until June 2020. As of April 30, 2010, Coca-Cola FEMSA has agreed with Cervejarias Kaiser (also now part of the Heineken Group) to continue to distribute and sell the Kaiser beer portfolio in Coca-Cola FEMSA’s Brazilian territories for a 20-year term beginning in 2003, consistent with the arrangement already in place. In addition, our logistic services subsidiary provides certain services to Cuauhtémoc Moctezuma and its subsidiaries.
Our other business consists of the following smaller operations that support our core operations:
Our logistics services subsidiary provides a broad range of logistics and vehicle maintenance services to Coca-Cola FEMSA, FEMSA Comercio and third-party clients in the beverages, consumer products and retail industries. It has operations in Mexico, Brazil, Colombia, Panama, Costa Rica, Nicaragua and Perú.
Our refrigeration business produces vertical and horizontal commercial refrigerators for the soft drink, beer and food industries, with an annual capacity of 535,800 units at December 31, 2014. In 2014, this business sold 418,064 refrigeration units, 30% of which were sold to Coca-Cola FEMSA, and the remainder of which were sold to third parties.
Our corporate services subsidiary employs our corporate staff, including the personnel managing the areas of finance, corporate accounting, taxation, legal, financial and strategic planning, human resources, corporate affairs and internal audit. Through this subsidiary, we direct, control, supervise and review the operations of our sub-holding companies. As of December 31, 2014, FEMSA Comercio and our other business subsidiaries pay management fees for the services provided to them. In addition, Coca-Cola FEMSA has entered into a services agreement pursuant to which it pays for specific services.
Description of Property, Plant and Equipment
As of December 31, 2014, we owned all of our manufacturing facilities and substantially all of our warehouses and distribution centers. Our properties primarily consisted of production and distribution facilities for our soft drink operations and office space. In addition, FEMSA Comercio owns approximately 11.2% of the OXXO store locations, while the other stores are located in properties that are rented under long-term lease arrangements with third parties.
The table below summarizes by country the installed capacity and percentage utilization of Coca-Cola FEMSA’s production facilities:
Bottling Facility Summary
As of December 31, 2014
Country | Installed Capacity (thousands of unit cases) | Utilization(1) (%) | ||||||
Mexico | 2,939,936 | 58 | % | |||||
Guatemala | 45,500 | 69 | % | |||||
Nicaragua | 67,700 | 68 | % | |||||
Costa Rica | 81,200 | 56 | % | |||||
Panama | 56,700 | 57 | % | |||||
Colombia | 532,616 | 56 | % | |||||
Venezuela | 275,542 | 86 | % | |||||
Brazil | 1,044,932 | 67 | % | |||||
Argentina | 340,397 | 65 | % |
(1) | Annualized rate. |
The table below summarizes by country the location and facility area of each of Coca-Cola FEMSA’s production facilities.
Bottling Facility by Location
As of December 31, 2014
Country | Plant | Facility Area | ||||
(thousands of sq. meters) | ||||||
Mexico | San Cristóbal de las Casas, Chiapas | 45 | ||||
Cuautitlán, Estado de México | 35 | |||||
Los Reyes la Paz, Estado de México | 50 | |||||
Toluca, Estado de México | 317 | |||||
León, Guanajuato | 124 | |||||
Morelia, Michoacán | 50 | |||||
Ixtacomitán, Tabasco | 117 | |||||
Apizaco, Tlaxcala | 80 | |||||
Coatepec, Veracruz | 142 | |||||
La Pureza Altamira, Tamaulipas | 300 | |||||
Poza Rica, Veracruz | 42 | |||||
Pacífico, Estado de México | 89 | |||||
Cuernavaca, Morelos | 37 | |||||
Toluca, Estado de México (Ojuelos) | 41 | |||||
San Juan del Río, Querétaro | 84 | |||||
Querétaro, Querétaro | 80 | |||||
Cayaco, Acapulco | 104 | |||||
Guatemala | Guatemala City | 46 | ||||
Nicaragua | Managua | 54 | ||||
Costa Rica | Calle Blancos, San José | 52 | ||||
Coronado, San José | 14 | |||||
Panama | Panama City | 29 | ||||
Colombia | Barranquilla | 37 | ||||
Bogotá, DC | 105 | |||||
Bucaramanga | 26 | |||||
Cali | 76 | |||||
Manantial, Cundinamarca | 67 | |||||
Tocancipá | 298 | |||||
Medellín | 47 |
Country | Plant | Facility Area | ||||
(thousands of sq. meters) | ||||||
Venezuela | Antímano | 15 | ||||
Barcelona | 141 | |||||
Maracaibo | 68 | |||||
Valencia | 100 | |||||
Brazil | Campo Grande | 36 | ||||
Jundiaí | 191 | |||||
Mogi das Cruzes | 119 | |||||
Belo Horizonte | 73 | |||||
Porto Real | 108 | |||||
Maringá | 160 | |||||
Marilia | 159 | |||||
Curitiba | 119 | |||||
Baurú | 39 | |||||
Itabirito | 320 | |||||
Argentina | Alcorta, Buenos Aires | 73 | ||||
Monte Grande, Buenos Aires | 32 |
We maintain an “all risk” insurance policy covering our properties (owned and leased), machinery and equipment and inventories as well as losses due to business interruptions. The policy covers damages caused by natural disaster, including hurricane, hail, earthquake and damages caused by human acts, including explosion, fire, vandalism and riot. We also maintain a freight transport insurance policy that covers damages to goods in transit. In addition, we maintain a liability insurance policy that covers product liability. We purchase our insurance coverage through an insurance broker. In 2014, the policies for “all risk” property insurance, freight transport insurance and liability insurance were issued by ACE Seguros, S.A. Our “all risk” coverage was partially reinsured in the international reinsurance market. We believe that our coverage is consistent with the coverage maintained by similar companies.
Capital Expenditures and Divestitures
Our consolidated capital expenditures, net of disposals, for the years ended December 31, 2014, 2013 and 2012 were Ps. 18,163 million, Ps. 17,882 million and Ps. 15,560 million respectively, and were for the most part financed from cash from operations generated by our subsidiaries. These amounts were invested in the following manner:
Year Ended December 31, | ||||||||||||
2014 | 2013 | 2012 | ||||||||||
(In millions of Mexican pesos) | ||||||||||||
Coca-Cola FEMSA | Ps. 11,313 | Ps. 11,703 | Ps. 10,259 | |||||||||
FEMSA Comercio | 5,191 | 5,683 | 4,707 | |||||||||
Other | 1,659 | 496 | 594 | |||||||||
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Total | Ps. 18,163 | Ps. 17,882 | Ps. 15,560 |
Coca-Cola FEMSA
In 2014, Coca-Cola FEMSA focused its capital expenditures on investments in (1) increasing production capacity, (2) placing coolers with retailers, (3) returnable bottles and cases, (4) improving the efficiency of its distribution infrastructure and (5) information technology. Through these measures, Coca-Cola FEMSA strives to improve its profit margins and overall profitability.
FEMSA Comercio
FEMSA Comercio’s principal investment activity is the construction and opening of new stores. During 2014, FEMSA Comercio opened 1,132 net new OXXO stores. FEMSA Comercio invested Ps. 5,191 million in 2014 in the addition of new stores, warehouses and improvements to leased properties.
Antitrust Legislation
TheLey Federal de Competencia Económica (Federal Antitrust Law) became effective on June 22, 1993, regulating monopolistic practices and requiring Mexican government approval of certain mergers and acquisitions. The Federal Antitrust Law subjects the activities of certain Mexican companies, including us, to regulatory scrutiny.
In June 2013, following a comprehensive reform to the Mexican Constitution, a new antitrust authority with autonomy was created: the Federal Antitrust Commission (Comisión Federal de Competencia Económica, or the CFCE). As a result of these amendments, new antitrust and telecommunications specialized courts were created and commenced hearing cases in an increaseAugust 2013. In July 2014, a new Federal Antitrust Law came into effect based on the amended constitutional provisions.
These amendments granted more power to the CFCE, including the ability to regulate essential facilities, order the divestment of assets and eliminate barriers to competition, set higher fines for violations of the Federal Antitrust Law, implement important changes to rules governing mergers and anti-competitive behavior and limit the availability of legal defenses against the application of the law. Management believes that we are currently in compliance costs,in all material respects with Mexican antitrust legislation.
In Mexico and in some of the other countries in which maywe operate, we are involved in different ongoing competition related proceedings. We believe that the outcome of these proceedings will not have ana material adverse effect on our financial position or results.See “Item 8. Financial Information—Legal Proceedings—Coca-Cola FEMSA’s future results from operations or financial condition.FEMSA.”
Price Controls
Voluntary price restraints or statutory price controls have been imposed historically in several of the countries in which Coca-Cola FEMSA operates. Coca-Cola FEMSA is currently subject toCurrently, there are no price controls in Argentina and Venezuela. The imposition of these restrictions or voluntary price restraints in other territories may have an adverse effect on Coca-Cola FEMSA’s results from operations and financial position. See “Item 4. Informationproducts in any of the Company—Regulatory Matters—Price Controls.” We cannot assure you that governmentalterritories in which it has operations, except for those in Argentina, where authorities in any countrydirectly supervise five products sold through supermarkets as a measure to control inflation, and Venezuela, where Coca-Cola FEMSA operates will not impose statutorythe government has imposed price controls or that Coca-Cola FEMSA will not need to implement voluntary price restraintson certain products, including bottled water. In addition, in the future.
In January 2010,2014, the Venezuelan government passed the Fair Prices Law (Ley Orgánica de Precios Justos), which was amended in November 2014 mainly to increase applicable fines and penalties. This law substitutes both the Access to Goods and Services Defense Law (Ley para la Defensa y Acceso a las Personas a los Bienes y Servicios (Defense of) and Access to Goodsthe Fair Costs and Services Law). Any violation by a company that produces, distributes and sells goods and services could lead to fines, penalties or the confiscation of the assets used to produce, distribute and sell these goods without compensation. Although we believe that Coca-Cola FEMSA is in compliance with this law, consumer protection laws in Venezuela are subject to continuing review and changes, and any such changes could lead to an adverse impact on Coca-Cola FEMSA.
In July 2011, the Venezuelan government passed thePrices Law (Ley de Costos y Precios JustosPartido Revolucionario Institucional (Fair Costs, was elected as the president of Mexico and Prices Law). The purposetook office on December 1, 2012. In addition, the Mexican Congress has recently approved a number of this law isstructural reforms intended to establish the regulations and administrative processes necessary to maintain the price stabilitymodernize certain sectors of and equal access to, goods and services. The law also creates the National Ministry of Costs and Prices, whose main role is to oversee price controls and set maximum retail prices on certain consumer goods and services. Of Coca-Cola FEMSA’s products, only certain of its still water beverages were affected by these regulations, which mandated Coca-Cola FEMSA to lower its sale prices as of April 2012. Any failure to comply with this law would result in fines, temporary suspension or the closure of operations. While Coca-Cola FEMSA is currently in compliance with this law, we cannot assure you that the Venezuelan government’s future regulation of goods and services will not result in a forced reduction of prices in other of Coca-Cola FEMSA’s products, which could have a negative effect on its results of operations.
In January 2012, the Costa Rican government approved a decree that regulates the sale of food and beverages in schools. The decree came into effect in 2012. Enforcement of this law will be gradual, from applicability in 2012 to 2014, depending on the specific characteristics of the food or beverage in question. In accordance with the decree, the sale of specific sparkling beverages and still beverages that contain sugar, syrup or HFCS in any type of presentation in schools is prohibited. Coca-Cola FEMSA will still be allowed to sell water and certain still beverages in schools. We cannot assure you that the Costa Rican government will not further restrict sales of other of Coca-Cola FEMSA’s products in schoolsfoster growth in the future; any suchMexican economy, and is continuing to approve further restrictions could lead to an adverse impact on Coca-Cola FEMSA’s results of operations.
Coca-Cola FEMSA’s operations have from time to time been subject to investigations and proceedings by antitrust authorities and litigation relating to alleged anticompetitive practices. Coca-Cola FEMSA has also been subject to investigations and proceedings on environmental and labor matters. We cannot assure you that these investigations and proceedings could not have an adverse effect on Coca-Cola FEMSA’s results from operations or financial condition. See “Item 8. Financial Information—Legal Proceedings.”
Economic and political conditions inreforms. Now two years into his term, President Peña Nieto will face significant challenges as the countries other than Mexico in which Coca-Cola FEMSA operates may increasingly adversely affect its business.
In addition to operating in Mexico, our subsidiary Coca-Cola FEMSA conducts operations in Guatemala, Nicaragua, Costa Rica, Panama, Colombia, Venezuela, Brazil and Argentina. Total revenues and income from Coca-Cola FEMSA’s combined non-Mexican operations increased as a percentage of its consolidated total revenues and income from operations from 47.4% and 32.4%, respectively, in 2006, to 64.3% and 62.0%, respectively, in 2011.As a consequence, Coca-Cola FEMSA’s results have been increasingly affectedstructural reforms approved by the economic and political conditions in the countries, other than Mexico, where it conducts operations.
Consumer demand, preferences, real prices and the costs of raw materials are heavily influenced by macroeconomic and political conditions in the other countries in which Coca-Cola FEMSA operates. These conditions vary by country and may not be correlated to conditions in Coca-Cola FEMSA’s Mexican operations. Deterioration in economic and political conditions in any of these countries would haveCongress begin having an adverse effect on Coca-Cola FEMSA’s financial position and results from operations. In Venezuela, Coca-Cola FEMSA continues to face exchange rate risk as well as scarcity of raw materials and restrictions with respect to the importation of such materials. Venezuelan political events may also affect Coca-Cola FEMSA’s operations. The political uncertainty involving Venezuela’s October 2012 elections or otherwise could have a negative effect on the VenezuelanMexican economy whichand population. Furthermore, no single party has a majority in turnthe Senate or theCámara de Diputados (House of Representatives), and the absence of a clear majority by a single party could result in an adverse effect on Coca-Cola FEMSA’s business.government gridlock and political uncertainty. We cannot provide any assurances that political developments in Venezuela,Mexico, over which we have no control, will not have an adverse effect on Coca-Cola FEMSA’sour business, financial condition, or results from operations.and prospects.
In addition, presidential elections were heldSecurity risks in November 2011Mexico could increase, and this could adversely affect our results.
The presence of violence among drug cartels, and between these and the Mexican law enforcement and armed forces, pose a risk to our business. Organized criminal activity and related violent incidents have decreased relative to 2012 and 2013, but remain prevalent in eachsome parts of GuatemalaMexico. These incidents are relatively concentrated along the northern Mexican border, as well as in certain other Mexican states such as Sinaloa, Michoacán and Nicaragua.Guerrero. The electionsnorth of Mexico is an important region for our retail operations, and an increase in Guatemala ledcrime rates could negatively affect our sales and customer traffic, increase our security expenses, and result in higher turnover of personnel or damage to the electionperception of a new presidentour brands. This situation could worsen and political party (thePartido Patriota(Patriotic Party)). The elections in Nicaragua ledadversely impact our business and financial results because consumer habits and patterns adjust to the reelectionincreased perceived and real security risks, as people refrain from going out as much and gradually shift some on-premise consumption to off-premise consumption of José Daniel Ortega Saavedra, a memberfood and beverages on certain social occasions.
Depreciation of thePartido Frente Sandinista de Liberación Nacional(Sandinista National Liberation Front), as president. We cannot assure you that the elected presidentslocal currencies in theseother Latin American countries will continue to apply the same policies that have been applied to Coca-Cola FEMSA in the past.which we operate may adversely affect our financial position.
DepreciationThe devaluation of the local currencies against the U.S. dollar in our non-Mexican territories can increase our operating costs in these countries, and depreciation of the local currencies against the Mexican peso can negatively affect our results for these countries. In recent years, the value of the currency in the countries in which Coca-Cola FEMSA operateswe operate has been relatively stable relative to the Mexican peso, except in Venezuela. During 2014, in addition to Venezuela, the currencies of Brazil and Argentina also depreciated against the U.S. dollar may increase its operating costs. Coca-Cola FEMSA has alsoMexican peso. Future currency devaluation or the imposition of exchange controls in any of these countries, or in Mexico, would have an adverse effect on our financial position and results.
We have operated under exchange controls in Venezuela since 2003, that limit itswhich limits our ability to remit dividends abroad or make payments other than in local currenciescurrency and that may increase the real price paid for raw materials and services purchased in local currency. In January 2010,We have historically used the official exchange rate (currently 6.30 bolivars to US$ 1.00) in our Venezuelan operations. Nonetheless, since the beginning of 2014, the Venezuelan government announced a devaluationseries of its official exchange rate and the establishment of a multiple exchange rate system, which was set at 2.60 bolivarschanges to US$ 1.00 for high priority categories and 4.30 bolivars to US$ 1.00 for non-priority categories, and which recognized the existence of other exchange rates in which the Venezuelan government will intervene. exchange control regime.
In December 2010,January 2014, the Venezuelan government announced its decision to implementan exchange rate determined by the state-run system known as theSistema Complementario de Administración de Divisas, or SICAD. In March 2014, the Venezuelan government announced a new singular fixedlaw that authorized an alternative method of exchanging Venezuelan bolivars to U.S. dollars known as SICAD II. In February 2015, the Venezuelan government announced that it was replacing SICAD II with a new market-based exchange rate determined by the system known as the Sistema Marginal de Divisas, or SIMADI. The SICAD determines the exchange rates based on limited periodic sales of U.S. dollars through auctions in which only entities authorized by the Venezuelan government may participate, while SIMADI determines the exchange rates based on supply and demand of U.S. dollars, in which participation does not require authorization by the Venezuelan government. The SICAD and SIMADI exchange rates in effect as of April 17, 2015, were 12.00 and 196.66 bolivars per US$ 1.00, respectively.
We translated our results of operations in Venezuela for the full year ended December 31, 2014 into our reporting currency, the Mexican peso, using the SICAD II exchange rate of 4.3049.99 bolivars to US$ 1.00, which resultedwas the exchange rate in effect as of such date. As a devaluationresult, we recognized a reduction in equity of Ps. 11,836 million as of December 31, 2014 and as of such date, our foreign direct investment in Venezuela was Ps. 4,015 million. This reduction adversely affected our comprehensive income for the bolivar againstyear ended December 31, 2014. In addition, the U.S. dollar. Future changestranslation of our Venezuelan results adversely affected our financial results of operation in the amount of Ps. 1,895 million for the year ended December 31, 2014.
Based upon our specific facts and circumstances, we anticipate using the SIMADI exchange rate to translate our future results of operations in Venezuela into our reporting currency, the Mexican peso, commencing with our results for the first quarter of 2015. This translation effect will further adversely affect our comprehensive income and financial position. The Venezuelan government may announce further changes to the exchange control regime,rate system in the future. To the extent a higher exchange rate is applied to our investment in Venezuela in future periods as a result of changes to existing regulations, subsequently adopted regulations or otherwise, we could be required to further reduce the amount of our foreign direct investment in Venezuela and our comprehensive income in Venezuela and financial condition could be further adversely affected. More generally, future currency devaluations or the imposition of exchange controls in any of the countries in which Coca-Cola FEMSA has operations could have an adverse effect on its financial position and results from operations.
We cannot assure you those political or social developments in any of the countries in which Coca-Cola FEMSA has operations, over which it has no control, will not have a corresponding adverse effect on the economic situation and on its business, financial condition or results from operations.
Weather conditionswe operate may adversely affect Coca-Cola FEMSA’s results from operations.
Lower temperatures and higher rainfall may negatively impact consumer patterns, which may result in lower per capita consumption of Coca-Cola FEMSA’s beverage offerings. Additionally, adverse weather conditions may affect road infrastructure in the territories in which Coca-Cola FEMSA operates and limit its ability to sell and distribute its products, thus affecting Coca-Cola FEMSA’s results from operations. As was the case in most of Coca-Cola FEMSA’s territories in 2011, adverse weather conditions affected Coca-Cola FEMSA’s sales in certain regions of these territories.
FEMSA Comercio
Competition from other retailers in Mexico could adversely affect FEMSA Comercio’s business.
The Mexican retail sector is highly competitive. FEMSA participates in the retail sector primarily through FEMSA Comercio. FEMSA Comercio’s OXXO convenience stores face competition on a regional basis from 7-Eleven, Super Extra, Super City and Círculo K stores. OXXO convenience stores also face competition from numerous small chains of retailers across Mexico and from retailers that participate with store formats other than convenience stores. FEMSA Comercio may face additional competition from new market entrants. Increased competition may limit the number of new locations available to FEMSA Comercio and require FEMSA Comercio to modify its product offering or pricing. In addition, consumers may prefer alternative products or store formats offered by competitors. As a result, FEMSA Comercio’s results from operations and financial position may be adversely affected by competition in the future.
Sales of OXXO convenience stores may be adversely affected by changes in economic conditions in Mexico.
Convenience stores often sell certain products at a premium. The convenience store market is thus highly sensitive to economic conditions, since an economic slowdown is often accompanied by a decline in consumer purchasing power, which in turn results in a decline in the overall consumption of FEMSA Comercio’s main product categories. During periods of economic slowdown, OXXO stores may experience a decline in traffic per store and purchases per customer, and this may result in a decline in FEMSA Comercio’s results from operations.
FEMSA Comercio may not be able to maintain its historic growth rate.
FEMSA Comercio increased the number of OXXO stores at a compound annual growth rate of 14.5% from 2007 to 2011. The growth in the number of OXXO stores has driven growth in total revenue andpotentially increase our operating income at FEMSA Comercio over the same period. As the overall number of stores increases, percentage growth in the number of OXXO stores is likely to decrease. In addition, as convenience store penetration in Mexico grows, the number of viable new store locations may decrease, and new store locations may be less favorable in terms of same store sales, average ticket and store traffic. As a result, FEMSA Comercio’s future results from operations and financial condition may not be consistent with prior periods and may be characterized by lower growth rates in terms of total revenue and operating income. In Colombia, FEMSA Comercio may not be able to maintain similar historic growth rates to those in Mexico.
FEMSA Comercio’s business may be adversely affected by an increase in the crime rate in Mexico.
In recent years, crime rates have increased, particularly in the north of Mexico, and there has been a particular increase in drug-related crime and other organized crime. Although FEMSA Comercio has stores across the majority of the Mexican territory, the north of Mexico represents an important region in FEMSA Comercio’s operations. An increase in crime rates could negatively affect sales and customer traffic, increase security expenses incurred in each store, result in higher turnover of personnel or damage to the perception of the OXXO brand, each ofcosts, which could have an adverse effect on FEMSA Comercio’s business.our financial position and comprehensive income.
ITEM 4. | INFORMATION ON THE COMPANY |
We are a Mexican company headquartered in Monterrey, Mexico, and our origin dates back to 1890. Our company was incorporated on May 30, 1936 and has a duration of 99 years. The duration can be extended indefinitely by resolution of our shareholders. Our legal name is Fomento Económico Mexicano, S.A.B. de C.V., and in commercial contexts we frequently refer to ourselves as FEMSA. Our principal executive offices are located at General Anaya No. 601 Pte., Colonia Bella Vista, Monterrey, Nuevo León 64410, Mexico. Our telephone number at this location is (52-81) 8328-6000. Our website is www.femsa.com. We are organized as asociedad anónima bursátil de capital variable under the laws of Mexico.
We conduct our operations through the following principal holding companies, each of which we refer to as a principal sub-holding company:
Coca-Cola FEMSA, Comercio’s business may be adversely affected by changeswhich engages in information technology.the production, distribution and marketing of beverages;
FEMSA Comercio, which operates small-format stores; and
CB Equity, which holds our investment in Heineken.
FEMSA Comercio invests aggressivelytraces its origins to the establishment of Mexico’s first brewery, Cervecería Cuauhtémoc, S.A., which we refer to as Cuauhtémoc, which was founded in information technology1890 by four Monterrey businessmen: Francisco G. Sada, José A. Muguerza, Isaac Garza and José M. Schneider. Descendants of certain of the founders of Cuauhtémoc are participants of the voting trust that controls the management of our company.
The strategic integration of our company dates back to 1936 when our packaging operations were established to supply crown caps to the brewery. During this period, these operations were part of what was known as the Monterrey Group, which also included interests in banking, steel and other packaging operations.
In 1974, the Monterrey Group was split between two branches of the descendants of the founding families of Cuauhtémoc. The steel and other packaging operations formed the basis for the creation of Corporación Siderúrgica, S.A. (now Alfa, S.A.B. de C.V.), controlled by the Garza Sada family, and the beverage and banking operations were consolidated under the Valores Industriales, S.A. de C.V. (the corporate predecessor of FEMSA) corporate umbrella controlled by the Garza Lagüera family. FEMSA’s shares were first listed on what is now the Bolsa Mexicana de Valores, S.A.B. de C.V. (which we refer to as IT)the Mexican Stock Exchange) on September 19, 1978. Between 1977 and 1981, FEMSA diversified its operations through acquisitions in order to maximize its value generation potential. Given the rapid speed at which FEMSA Comercio adds new servicessoft drinks and products to its commercial offerings,mineral water industries, the development of IT systems, hardware and software needs to keep pace with the growthestablishment of the business. If these systems became unstable or if planning for future ITfirst stores under the trade name OXXO and other investments in the hotel, construction, auto parts, food and fishing industries, which were inadequate, it could affectconsidered non-core businesses and were subsequently divested.
In the 1990s, we began a series of strategic transactions to strengthen the competitive positions of our operating subsidiaries. These transactions included the sale of a 30% strategic interest in Coca-Cola FEMSA Comercio’s business by reducing the flexibilityto a wholly-owned subsidiary of its value proposition to consumers or by increasing its operating complexity, eitherThe Coca-Cola Company and a subsequent public offering of Coca-Cola FEMSA shares, both of which could adversely affectoccurred in 1993. Coca-Cola FEMSA Comercio’s revenue-per-store trends.listed its L shares on the Mexican Stock Exchange and, in the form of ADS, on the New York Stock Exchange.
Risks Related to Our Holding of Heineken N.V. and Heineken Holding N.V. Shares
FEMSA will not control Heineken N.V.’s and Heineken Holding N.V.’s decisions.
On April 30, 2010, FEMSA announcedIn 1998, we completed a reorganization that changed our capital structure by converting our outstanding capital stock at the closingtime of the transaction pursuantreorganization into BD Units and B Units, and united the shareholders of FEMSA and the former shareholders of Grupo Industrial Emprex, S.A. de C.V. (which we refer to whichas Emprex) at the same corporate level through an exchange offer that was consummated on May 11, 1998. As part of the reorganization, FEMSA agreed to exchangelisted ADSs on the NYSE representing BD Units, and listed the BD Units and its B Units on the Mexican Stock Exchange.
In May 2003, our subsidiary Coca-Cola FEMSA expanded its operations throughout Latin America by acquiring 100% of its beer operations for a 20% economic interest in the Heineken Group,Panamerican Beverages, Inc., which we refer to as Panamco, then the Heineken transaction. Aslargest soft drink bottler in Latin America in terms of sales volume in 2002. Through its acquisition of Panamco, Coca-Cola FEMSA began producing and distributingCoca-Cola trademark beverages in additional territories in Mexico, Central America, Colombia, Venezuela and Brazil, along with bottled water, beer and other beverages in some of these territories. The Coca-Cola Company and its subsidiaries received Series D Shares in exchange for their equity interest in Panamco of approximately 25%.
In April 2008, FEMSA shareholders approved a consequenceproposal to amend our bylaws in order to preserve the unit structure for our shares that has been in place since May 1998, and to maintain our existing share structure beyond May 11, 2008. Our bylaws previously provided that on May 11, 2008 our Series D-B Shares would convert into Series B Shares and our Series D-L Shares would convert into Series L Shares with limited voting rights. In addition, our bylaws provided that, on May 11, 2008, our current unit structure would cease to exist and each of our B Units would be unbundled into five Series B Shares, while each BD Unit would unbundle into three Series B Shares and two newly issued Series L Shares. Following the Heineken transaction,April 22, 2008 shareholder approvals, the automatic conversion of our share and unit structures no longer exist, and, absent shareholder action, our share structure will continue to be comprised of Series B Shares, which must represent not less than 51% of our outstanding capital stock, and Series D-B and Series D-L Shares, which together may represent up to 49% of our outstanding capital stock. Our Unit structure, absent shareholder action, will continue to consist of B Units, which bundle five Series B Shares, and BD Units, which bundle one Series B Share, two Series D-B Shares and two Series D-L Shares. See “Item 9. The Offer and Listing—Description of Securities.”
In January 2010, FEMSA now participates in the Heineken Holding N.V.announced that its Board of Directors unanimously approved a definitive agreement under which we refer to as the Heineken Holding Board, and in the Heineken N.V. Supervisory Board, which we refer to as the Heineken Supervisory Board. However, FEMSA is not a majority or controlling shareholder of Heineken N.V. or Heineken Holding N.V., nor does it control the decisions of the Heineken Holding Board or the Heineken Supervisory Board. Therefore, the decisions made by the majority or controlling shareholders of Heineken N.V. or Heineken Holding N.V. or the Heineken Holding Board or the Heineken Supervisory Board may not be consistent with or may not consider the interests of FEMSA’s shareholders or may be adverse to the interests of FEMSA’s shareholders. Additionally, FEMSA has agreed not to disclose non-public information and decisions taken by Heineken.
Heineken is present in a large number of countries.
Heineken is a global distributor and brewer of beer in a large number of countries. As a consequence of the Heineken transaction, FEMSA shareholders are indirectly exposed to the political, economic and social circumstances affecting the markets in which Heineken is present, which may have an adverse effect on the value of FEMSA’s interest in Heineken, and, consequently, the value of FEMSA shares.
Strengthening of the Mexican peso.
In the event of a depreciation of the euro against the Mexican peso, the fair value of FEMSA’s investment in shares will be adversely affected.
Furthermore, the cash flow that is expected to be received in the form of dividends from Heineken will be in euros, and therefore, in the event of a depreciation of the euro against the Mexican peso, the amount of expected cash flow will be adversely affected.
Heineken N.V. and Heineken Holding N.V. are publicly listed companies.
Heineken N.V. and Heineken Holding N.V. are listed companies whose stock trades publicly and is subject to market fluctuation. A reduction in the price of Heineken N.V. or Heineken Holding N.V. shares would result in a reduction in the economic value of FEMSA’s participation in Heineken.
Risks Related to Our Principal Shareholders and Capital Structure
A majority of our voting shares are held by a voting trust, which effectively controls the management of our company, and whose interests may differ from those of other shareholders.
As of March 23, 2012, a voting trust, of which the participants are members of seven families, owned 38.69% of our capital stock and 74.86% of our capital stock with full voting rights, consisting of the Series B Shares. Consequently, the voting trust has the power to elect a majority of the members of our board of directors and to play a significant or controlling role in the outcome of substantially all matters to be decided by our board of directors or our shareholders. The interests of the voting trust may differ from those of our other shareholders. See “Item 7. Major Shareholders and Related Party Transactions” and “Item 10. Additional Information—Bylaws—Voting Rights and Certain Minority Rights.”
Holders of Series D-B and D-L Shares have limited voting rights.
Holders of Series D-B and D-L Shares have limited voting rights and are only entitled to vote on specific matters, such as certain changes in the form of our corporate organization, dissolution, or liquidation, a merger with a company with a distinct corporate purpose, a merger in which we are not the surviving entity, a change of our jurisdiction of incorporation, the cancellation of the registration of the Series D-B and D-L Shares and any other matters that expressly require approval from such holders under the Mexican Securities Law. As a result of these limited voting rights, Series D-B and D-L holders will not be able to influence our business or operations. See “Item 7. Major Shareholders and Related Party Transactions—Major Shareholders” and “Item 10. Additional Information—Bylaws—Voting Rights and Certain Minority Rights.”
Holders of ADSs may not be able to vote at our shareholder meetings.
Our shares are traded on the New York Stock Exchange, or NYSE, in the form of ADSs. We cannot assure you that holders of our shares in the form of ADSs will receive notice of shareholders’ meetings from our ADS depositary in sufficient time to enable such holders to return voting instructions to the ADS depositary in a timely manner. In the event that instructions are not received with respect to any shares underlying ADSs, the ADS depositary will, subject to certain limitations, grant a proxy to a person designated by us in respect of these shares. In the event that this proxy is not granted, the ADS depositary will vote these shares in the same manner as the majority of the shares of each class for which voting instructions are received.
Holders of BD Units in the United States and holders of ADSs may not be able to participate in any future preemptive rights offering and as a result may be subject to dilution of their equity interests.
Under applicable Mexican law, if we issue new shares for cash as a part of a capital increase, other than in connection with a public offering of newly issued shares or treasury stock, we are generally required to grant our shareholders the right to purchase a sufficient number of shares to maintain their existing ownership percentage. Rights to purchase shares in these circumstances are known as preemptive rights. By law, we may not allow holders of our shares or ADSs who are located in the United States to exercise any preemptive rights in any future capital increases unless (1) we file a registration statement with the U.S. Securities and Exchange Commission, which we refer to as the SEC, with respect to that future issuance of shares or (2) the offering qualifies for an exemption from the registration requirements of the U.S. Securities Act of 1933. At the time of any future capital increase, we will evaluate the costs and potential liabilities associated with filing a registration statement with the SEC, as well as the benefits of preemptive rights to holders of our shares in the form of ADSs in the United States and any other factors that we consider important in determining whether to file a registration statement.
We may decide not to file a registration statement with the SEC to allow holders of our shares or ADSs who are located in the United States to participate in a preemptive rights offering. In addition, under current Mexican law, the sale by the ADS depositary of preemptive rights and the distribution of the proceeds from such sales to the holders of our shares in the form of ADSs is not possible. As a result, the equity interest of holders of our shares in the form of ADSs would be diluted proportionately. See “Item 10. Additional Information—Bylaws—Preemptive Rights.”
The protections afforded to minority shareholders in Mexico are different from those afforded to minority shareholders in the United States.
Under Mexican law, the protections afforded to minority shareholders are different from, and may be less than, those afforded to minority shareholders in the United States. Mexican laws do not provide a remedy to shareholders relating to violations of fiduciary duties. There is no procedure for class actions as such actions are conducted in the United States and there are different procedural requirements for bringing shareholder lawsuits against directors for the benefit of companies. Therefore, it may be more difficult for minority shareholders to enforce their rights against us, our directors or our controlling shareholders than it would be for minority shareholders of a United States company.
Investors may experience difficulties in enforcing civil liabilities against us or our directors, officers and controlling persons.
FEMSA is organized under the laws of Mexico, and most of our directors, officers and controlling persons reside outside the United States. In addition, all or a substantial portion of our assets and their respective assets are located outside the United States. As a result, it may be difficult for investors to effect service of process within the United States on such persons or to enforce judgments against them, including any action based on civil liabilities under the U.S. federal securities laws. There is doubt as to the enforceability against such persons in Mexico, whether in original actions or in actions to enforce judgments of U.S. courts, of liabilities based solely on the U.S. federal securities laws.
Developments in other countries may adversely affect the market for our securities.
The market value of securities of Mexican companies is, to varying degrees, influenced by economic and securities market conditions in other emerging market countries. Although economic conditions are different in each country, investors’ reaction to developments in one country can have effects on the securities of issuers in other countries, including Mexico. We cannot assure you that events elsewhere, especially in emerging markets, will not adversely affect the market value of our securities.
The failure or inability of our subsidiaries to pay dividends or other distributions to us may adversely affect us and our ability to pay dividends to holders of ADSs.
FEMSA is a holding company. Accordingly, FEMSA’s cash flows are principally derived from dividends, interest and other distributions made to FEMSA byexchange its subsidiaries. Currently, FEMSA’s subsidiaries do not have contractual obligations that require them to pay dividends to FEMSA. In addition, debt and other contractual obligations of our subsidiaries may in the future impose restrictions on our subsidiaries’ ability to make dividend or other payments to FEMSA, which in turn may adversely affect FEMSA’s ability to pay dividends to shareholders and meet its debt and other obligations. As of December 31, 2011, FEMSA had no restrictions on its ability to pay dividends. Given the exchange of 100% of our FEMSA Cerveza business for a 20% economic interest in Heineken, one of the world’s leading brewers. In April 2010, FEMSA announced the closing of the transaction, after Heineken N.V., Heineken Holding N.V. and FEMSA held their corresponding AGMs and approved the transaction. Under the terms of the agreement, FEMSA received 43,018,320 shares of Heineken Holding N.V. and 43,009,699 shares of Heineken N.V., with an additional 29,172,504 shares of Heineken N.V. (which shares we refer to as the Allotted Shares) delivered pursuant to an allotted share delivery instrument, or the ASDI. Heineken also assumed US$ 2.1 billion of indebtedness, including FEMSA Cerveza’s unfunded pension obligations. The Allotted Shares were delivered to FEMSA in several installments during 2010 and 2011, with the final installment delivered on October 5, 2011. As of December 31, 2014, FEMSA’s interest in Heineken N.V. represented 12.53% of Heineken N.V.’s outstanding capital and 14.94% of Heineken Holding N.V.’s outstanding capital, resulting in our 20% economic interest in the Heineken Group. The principal terms of the Heineken transaction documents are summarized below in “Item 10. Additional Information—Material Contracts.”
In 2012, Coca-Cola FEMSA began the construction of a production plant in Minas Gerais, Brazil, which was completed and began operations in November 2014. This project required an investment of R$584 million Brazilian reais (equivalent to approximately US$ 260 million). It is expected that the plant will generate approximately 700 direct and indirect jobs. The plant is located on a parcel of land 320,000 square meters in size, and it is expected that by the end of 2015 the annual production capacity will be approximately 1.2 billion liters of sparkling beverages (or approximately 200 million unit cases), representing an increase of approximately 62% as compared to the current installed capacity of Coca-Cola FEMSA’s plant in Belo Horizonte, Brazil.
In May 2012, Coca-Cola FEMSA closed its merger with Grupo Fomento Queretano, with operations mainly in the state of Querétaro, as well as in parts of the states of Mexico, Hidalgo, and Guanajuato.
On September 24, 2012, FEMSA signed definitive agreements to sell its wholly owned subsidiary Industria Mexicana de Quimicos, S.A. de C.V. (which we refer to as Quimiproductos) to a Mexican subsidiary of Ecolab Inc. (NYSE: ECL). Quimiproductos manufactures and provides cleaning and sanitizing products and services related to food and beverage industrial processes, as well as water treatment. The transaction is consistent with FEMSA’s long-standing strategy to divest non-core businesses. Quimiproductos was sold on December 31, 2012, resulting in a gain of Ps. 871 million.
In 2013, Coca-Cola FEMSA began the construction of a production plant in Tocancipá, Colombia, which was completed and began operations in February 2015. This project required an investment of 382 billion Colombian pesos (approximately US$ 194 million). Coca-Cola FEMSA expects that the plant will generate approximately 800 direct and indirect jobs. Certain permits are currently in process of being obtained, andCoca-Cola FEMSA expects to obtain these pending permits during 2015. Coca-Cola FEMSA is currently operating with water provided by the municipality, as an alternative source. The plant is located on a parcel of land 298,000 square meters in size, and it is expected that by the end of 2015, the annual production capacity will be approximately 730 million liters of sparkling beverages (or approximately 130 million unit cases), representing an increase of approximately 24% as compared to the current installed capacity of Coca-Cola FEMSA’s plants in Colombia.
On January 25, 2013, Coca-Cola FEMSA closed the transaction with The Coca-Cola Company to acquire a 51% non-controlling majority stake in CCFPI for US$ 688.5 million (Ps. 8,904 million) in an all-cash transaction. Coca-Cola FEMSA has an option to acquire the remaining 49% stake in CCFPI at any time during the seven years following the closing date. Coca-Cola FEMSA also has a put option to sell its ownership in CCFPI to The Coca-Cola Company commencing on the fifth anniversary of the closing date and ending on the sixth anniversary of the closing date. Coca-Cola FEMSA currently manages the day-to-day operations of the business; however, during a four-year period ending January 25, 2017 the business plan and other operational decisions must be approved jointly with The Coca-Cola Company. Coca-Cola FEMSA currently recognizes the results of CCFPI using the equity method.
In May 2013, Coca-Cola FEMSA closed its merger with Grupo Yoli, one of the oldest family-owned Coca-Cola bottlers in Mexico, operating mainly in the state of Guerrero as well as in parts of the state of Oaxaca.
On May 2, 2013, FEMSA Comercio through one of its subsidiaries, Cadena Comercial de Farmacias, S.A.P.I. de C.V. (which we refer to as CCF), closed the acquisition of Farmacias YZA, a leading drugstore operator in Southeast Mexico, headquartered in Merida, Yucatan. The founding shareholders of Farmacias YZA hold a 25% stake in CCF. In a separate transaction, on May 13, 2013, CCF acquired Farmacias FM Moderna, a leading drugstore operator in the western state of Sinaloa.
In August 2013, Coca-Cola FEMSA closed its acquisition of Companhia Fluminense de Refrigerantes (which we refer to as Companhia Fluminense), a family owned franchise that operates in parts of the states of São Paulo, Minas Gerais and Rio de Janeiro in Brazil. Companhia Fluminense sold approximately 56.6 million unit cases (including beer) in the twelve months ended March 31, 2013.
In October 2013, the Board of Directors agreed to separate the roles of Chairman of the Board and Chief Executive Officer, ratifying José Antonio Fernández Carbajal as Executive Chairman of the Board and naming Carlos Salazar Lomelín as the new Chief Executive Officer of FEMSA.
In October 2013, Coca-Cola FEMSA closed its acquisition of Spaipa, the second largest family owned franchise in Brazil, with operations in the state of Paraná and in parts of the state of São Paulo.
In December 2013, FEMSA Comercio, through one of its subsidiaries, purchased the operating assets and trademarks of Doña Tota, a leading quick-service restaurant operator in Mexico. The founding shareholders of Doña Tota hold a 20% stake in the FEMSA Comercio subsidiary that now operates the Doña Tota business.
In December 2014, FEMSA Comercio through CCF, agreed to acquire 100% of Farmacias Farmacón, a regional pharmacy chain consisting of 213 stores in the northwestern Mexican states of Sinaloa, Sonora, Baja California and Baja California Sur. The transaction is pending customary regulatory approvals, and is expected to close during the second quarter of 2015.
For more information on Coca-Cola FEMSA’s recent transactions, see“Item 4. Information on the Company—Coca-Cola FEMSA.”
We conduct our business through our principal sub-holding companies as shown in the following diagram and table:
Principal Sub-holding Companies—Ownership Structure
As of March 31, 2015
(1) | Compañía Internacional de Bebidas, S.A. de C.V., which we refer to as CIBSA. |
(2) | Percentage of issued and outstanding capital stock owned by CIBSA (63.0% of shares with full voting rights). |
(3) | Ownership in CB Equity held through various FEMSA subsidiaries. |
(4) | Combined economic interest in Heineken N.V. and Heineken Holding N.V. |
The following table presents an overview of our operations by reportable segment and by geographic area:
Operations by Segment—Overview
Year Ended December 31, 2014 and % of growth (decrease) vs. last year
(in million of Mexican pesos, except for employees and percentages)
Coca-Cola FEMSA | FEMSA Comercio | CB Equity(1) | ||||||||||||||||||||||
Total revenues | Ps. 147,298 | (6 | %) | Ps. 109,624 | 12 | % | Ps. — | — | ||||||||||||||||
Gross Profit | 68,382 | (6 | %) | 39,386 | 14 | % | — | — | ||||||||||||||||
Share of the (loss) profit of associates and joint ventures accounted for using the equity method, net of taxes | (125 | ) | (143 | %)(2) | 37 | 236 | % | 5,244 | 14 | % | ||||||||||||||
Total assets | 212,366 | (2 | %) | 43,722 | 10 | % | 85,742 | 4 | % | |||||||||||||||
Employees | 83,371 | (2 | %) | 110,671 | 7 | % | — | — |
(1) | CB Equity holds our Heineken N.V. and Heineken Holding N.V. shares. |
(2) | Reflects the percentage decrease between the gain of ps. 289 million recorded in 2013 and the loss of ps. 125 million recorded in 2014. |
Total Revenues Summary by Segment(1)
Year Ended December 31, | ||||||||||||
2014 | 2013 | 2012 | ||||||||||
Coca-Cola FEMSA | Ps.147,298 | Ps. 156,011 | Ps. 147,739 | |||||||||
FEMSA Comercio | 109,624 | 97,572 | 86,433 | |||||||||
Other | 20,069 | 17,254 | 15,899 | |||||||||
Consolidated total revenues | Ps. 263,449 | Ps. 258,097 | Ps. 238,309 |
(1) | The sum of the financial data for each of our segments and percentages with respect thereto differ from our consolidated financial information due to intercompany transactions, which are eliminated in consolidation, and certain assets and activities of FEMSA. |
Total Revenues Summary by Geographic Area(1)
Year Ended December 31, | ||||||||||||
2014 | 2013 | 2012 | ||||||||||
Mexico and Central America(2) | Ps. 186,736 | Ps. 171,726 | Ps. 155,576 | |||||||||
South America(3) | 69,172 | 55,157 | 56,444 | |||||||||
Venezuela | 8,835 | 31,601 | 26,800 | |||||||||
Consolidated total revenues | 263,449 | 258,097 | 238,309 |
(1) | The sum of the financial data for each geographic area differs from our consolidated financial information due to intercompany transactions, which are eliminated in consolidation. |
(2) | Central America includes Guatemala, Nicaragua, Costa Rica and Panama. Domestic (Mexico-only) revenues were Ps. 178,125 million, Ps. 163,351 million and Ps. 148,098 million for the years ended December 31, 2014, 2013 and 2012, respectively. |
(3) | South America includes Brazil, Colombia and Argentina. South America revenues include Brazilian revenues of Ps. 45,799 million, Ps. 31,138 million and Ps. 30,930 million; Colombian revenues of Ps. 14,207 million, Ps. 13,354 million and Ps. 14,597 million; and Argentine revenues of Ps. 9,714 million, Ps. 10,729 million and Ps. 10,270 million, for the years ended December 31, 2014, 2013 and 2012, respectively. |
The following table sets forth our significant subsidiaries as of December 31, 2014:
Name of Company | Jurisdiction of Establishment | Percentage Owned | ||||
CIBSA: | Mexico | 100.0 | % | |||
Coca-Cola FEMSA | Mexico | 47.9 | %(1) | |||
Emprex: | Mexico | 100.0 | % | |||
FEMSA Comercio | Mexico | 100.0 | % | |||
CB Equity(2) | United Kingdom | 100.0 | % |
(1) | Percentage of capital stock. FEMSA, through CIBSA, owns 63.0% of the shares of Coca-Cola FEMSA with full voting rights. |
(2) | Ownership in CB Equity held through various FEMSA subsidiaries. CB Equity holds our Heineken N.V and Heineken Holding N.V. shares. |
FEMSA is a leading company that participates in the beverage industry through Coca-Cola FEMSA, the largest franchise bottler of Coca-Cola products in the world; and in the beer industry, through its ownership of the second largest equity stake in Heineken, one of the world’s leading brewers with operations in over 70 countries. In the retail industry FEMSA participates with FEMSA Comercio, operating various small-format store chains including OXXO, the largest and fastest-growing in the Americas. Additionally, through its strategic businesses, FEMSA provides logistics, point-of-sale refrigeration solutions and plastics solutions to FEMSA’s business units and third-party clients.
We understand the importance of connecting with our end consumers by interpreting their needs, and ultimately delivering the right products to them for the right occasions and the optimal value proposition. We strive to achieve this by developing brand value, expanding our significant distribution capabilities, and improving the efficiency of our operations while aiming to reach our full potential. We continue to improve our information gathering and processing systems in order to better know and understand what our consumers want and need, and we are improving our production and distribution by more efficiently leveraging our asset base.
We believe that the competencies that our businesses have developed can be replicated in other geographic regions. This underlying principle guided our consolidation efforts, which led to our current continental footprint. We have presence in Mexico, Central and South America and the Philippines including some of the most populous metropolitan areas in Latin America—which has provided us with opportunities to create value through both an improved ability to execute our strategies and the use of superior marketing tools. We have also increased our capabilities to operate and succeed in other geographic regions, by developing management to gain an understanding of local consumer needs. Going forward, we intend to use those capabilities to continue our international expansion of both Coca-Cola FEMSA and FEMSA Comercio, expanding both our geographic footprint and our presence in the non-alcoholic beverage industry and small box retail formats, as well as taking advantage of potential opportunities to leverage our skill set and key competencies.
Our objective is to create economic, social and environmental value for our stakeholders—including our employees, our consumers, our shareholders and the enterprises and institutions within our society—now and into the future.
Overview
Coca-Cola FEMSA is the largest franchise bottler ofCoca-Colatrademark beverages in the world. It operates in territories in the following countries:
Mexico – a substantial portion of central Mexico, the southeast and northeast of Mexico (including the Gulf region).
Central America – Guatemala (Guatemala City and surrounding areas), Nicaragua (nationwide), Costa Rica (nationwide) and Panama (nationwide).
Colombia – most of the country.
Venezuela – nationwide.
Brazil – a major part of the states of São Paulo and Minas Gerais, the states of Paraná and Mato Grosso do Sul and part of the states of Rio de Janeiro and Goiás.
Argentina – Buenos Aires and surrounding areas.
Philippines – nationwide (through a joint venture with The Coca-Cola Company).
Coca-Cola FEMSA was incorporated on October 30, 1991 as a stock corporation with variable capital (sociedad anónima de capital variable) under the laws of Mexico for a term of 99 years. On December 5, 2006, as required by amendments to the Mexican Securities Market Law, Coca-Cola FEMSA became a publicly traded stock corporation with variable capital (sociedad anónima bursátil de capital variable). Coca-Cola FEMSA’s legal name is Coca-Cola FEMSA, S.A.B. de C.V. Coca-Cola FEMSA’s principal executive offices are located at Calle Mario Pani No. 100, Colonia Santa Fe Cuajimalpa, Delegación Cuajimalpa de Morelos, 05348, México, D.F., México. Coca-Cola FEMSA’s telephone number at this location is (52-55) 1519-5000. Coca-Cola FEMSA’s website iswww.coca-colafemsa.com.
The following is an overview of Coca-Cola FEMSA’s operations by consolidated reporting segment in 2014.
Operations by Consolidated Reporting Segment—Overview
Year Ended December 31, 2014
Total Revenues (millions of Mexican pesos) | Percentage of Total Revenues | Gross Profit (millions of Mexican pesos) | Percentage of Gross Profit | |||||||||||||
Mexico and Central America(1) | 71,965 | 48.9 | % | 36,453 | 53.3 | % | ||||||||||
South America(2) (excluding Venezuela) | 66,367 | 45.0 | % | 27,372 | 40.0 | % | ||||||||||
Venezuela | 8,966 | 6.1 | % | 4,557 | 6.7 | % | ||||||||||
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Consolidated | 147,298 | 100.0 | % | 68,382 | 100.0 | % |
(1) | Includes Mexico, Guatemala, Nicaragua, Costa Rica and Panama. |
(2) | Includes Colombia, Brazil and Argentina. |
Corporate History
Coca-Cola FEMSA commenced operations in 1979, when one of our subsidiaries acquired certain sparkling beverage bottlers. In 1991, we transferred our ownership in the bottlers to FEMSA Refrescos, S.A. de C.V., the corporate predecessor to Coca-Cola FEMSA, S.A.B. de C.V.
In June 1993, a subsidiary of The Coca-Cola Company subscribed for 30% of Coca-Cola FEMSA’s capital stock in the form of Series D shares. In September 1993, we sold Series L shares that represented 19.0% of Coca-Cola FEMSA’s capital stock to the public, and Coca-Cola FEMSA listed these shares on the Mexican Stock Exchange and, in the form of ADSs, on the New York Stock Exchange.
In a series of transactions since 1994, Coca-Cola FEMSA has acquired new territories, brands and other businesses which today comprise Coca-Cola FEMSA’s business. In May 2003, Coca-Cola FEMSA acquired Panamco and began producing and distributingCoca-Colatrademark beverages in additional territories in the central and gulf regions of Mexico and in Central America (Guatemala, Nicaragua, Costa Rica and Panama), Colombia, Venezuela and Brazil, along with bottled water, beer and other beverages in some of these territories.
In November 2006, we acquired 148,000,000 of Coca-Cola FEMSA’s Series D shares from certain subsidiaries of The Coca-Cola Company, which increased our ownership of Coca-Cola FEMSA to 53.7%.
In November 2007, Coca-Cola FEMSA acquired together with The Coca-Cola Company 100% of the shares of capital stock of Jugos del Valle, S.A.P.I. de C.V., or Jugos del Valle. In 2008, Coca-Cola FEMSA, The Coca-Cola Company and all Mexican and BrazilianCoca-Cola bottlers entered into a joint business for the Mexican and Brazilian operations, respectively, of Juegos del Valle.
In December 2007 and May 2008, Coca-Cola FEMSA sold most of its proprietary brands to The Coca-Cola Company. The proprietary brands are now being licensed back to Coca-Cola FEMSA by The Coca-Cola Company pursuant to its bottler agreements.
In May 2008, Coca-Cola FEMSA entered into a transaction with The Coca-Cola Company to acquire its wholly owned bottling franchise Refrigerantes Minas Gerais, Ltda., or REMIL, located in the State of Minas Gerais in Brazil.
In July 2008, Coca-Cola FEMSA acquired the Agua De Los Angeles bulk water business in the Valley of Mexico (Mexico City and surrounding areas) from Grupo Embotellador CIMSA, S.A. de C.V., at the time one of the Coca-Cola bottling franchises in Mexico. The trademarks remain with The Coca-Cola Company. Coca-Cola FEMSA subsequently merged Agua De Los Angeles into its bulk water business under theCielbrand.
In February 2009, Coca-Cola FEMSA together with The Coca-Cola Company acquired the Brisa bottled water business in Colombia from Bavaria, S.A., a subsidiary of SABMiller plc. Coca-Cola FEMSA acquired the production assets and the distribution territory and The Coca-Cola Company acquired theBrisa brand.
In May 2009, Coca-Cola FEMSA entered into an agreement to manufacture, distribute and sell theCrystal trademark water products in Brazil jointly with The Coca-Cola Company.
In August 2010, Coca-Cola FEMSA acquired from The Coca-Cola Company along with other Brazilian Coca-Cola bottlers Leão Alimentos e Bebidas, Ltda. or Leão Alimentos, manufacturer and distributor of theMatte Leão tea brand.
In March 2011, Coca-Cola FEMSA together with The Coca-Cola Company acquired Grupo Industrias Lacteas, S.A. (also known as Estrella Azul), a Panamanian conglomerate that participates in the dairy and juice-based beverage categories in Panama.
In October 2011, Coca-Cola FEMSA merged with Grupo Tampico, one of the largest family-ownedCoca-Cola bottlers in Mexico in terms of sales volume with operations in the states of Tamaulipas, San Luis Potosí, and Veracruz, as well as in parts of the states of Hidalgo, Puebla and Queretaro.
In December 2011, Coca-Cola FEMSA merged with Grupo CIMSA and its shareholders, a Mexican family-ownedCoca-Cola bottler with operations mainly in the states of Morelos and Mexico, as well as in parts of the states of Guerrero and Michoacán. As part of its merger with Grupo CIMSA, Coca-Cola FEMSA also acquired a 13.2% equity interest in Promotora Industrial Azucarera, S.A de C.V., or PIASA.
In May 2012, Coca-Cola FEMSA merged with Grupo Fomento Queretano, one of the oldest family-owned beverage players in theCoca-Cola system in Mexico, with operations mainly in the state of Querétaro, as well as in parts of the states of Mexico, Hidalgo and Guanajuato. For further information, see Note 4 to our audited consolidated financial statements. As part of Coca-Cola FEMSA’s merger with Grupo Fomento Queretano it also acquired an additional 12.9% equity interest in PIASA.
In August 2012, Coca-Cola FEMSA acquired, through Jugos del Valle, an indirect participation in Santa Clara Mercantil de Pachuca, S.A. de C.V., or Santa Clara, a producer of milk and dairy products in Mexico.
In January 2013, Coca-Cola FEMSA together with The Coca-Cola Company acquired a 51% non- controlling majority stake in CCFPI in an all-cash transaction.
In May 2013, Coca-Cola FEMSA merged with Grupo Yoli, one of the oldest family-owned Coca-Cola bottlers in Mexico, with operations mainly in the state of Guerrero as well as in parts of the state of Oaxaca. For further information, see Note 4 to our audited consolidated financial statements. As part of its merger with Grupo Yoli, Coca-Cola FEMSA also acquired an additional 10.1% equity interest in PIASA for a total ownership of 36.3%.
In August 2013, Coca-Cola FEMSA acquired Companhia Fluminense, a family owned franchise that operates in parts of the states of São Paulo, Minas Gerais and Rio de Janeiro in Brazil. For further information, see Note 4 to our audited consolidated financial statements. As part of Coca-Cola FEMSA’s acquisition of Companhia Fluminense, Coca-Cola FEMSA also acquired an additional 1.2% equity interest in Leão Alimentos.
In October 2013, Coca-Cola FEMSA acquired Spaipa, the second largest family owned franchise in Brazil, with operations in the state of Paraná and in parts of the state of São Paulo. For further information, see Note 4 to our audited consolidated financial statements. As part of its acquisition of Spaipa, Coca-Cola FEMSA also acquired an additional 5.8% equity interest in Leão Alimentos, for a total ownership as of April 10, 2015 of 24.4%, and a 50.0% stake in Fountain Água Mineral Ltda., a joint venture to develop the water category together with The Coca-Cola Company.
For further information see “Item 7. Major Shareholders and Related Party Transactions—Related Party Transactions—Business Transactions between Coca-Cola FEMSA, FEMSA and The Coca-Cola Company.”
Capital Stock
As of April 17, 2015, we indirectly owned Series A shares equal to 47.9% of Coca-Cola FEMSA’s capital stock (63.0% of Coca-Cola FEMSA’s capital stock with full voting rights). As of April 17, 2015, The Coca-Cola Company indirectly owned Series D shares equal to 28.1% of the capital stock of Coca-Cola FEMSA (37.0% of the capital stock with full voting rights). Series L shares with limited voting rights, which trade on the Mexican Stock Exchange and in the form of ADSs on the New York Stock Exchange, constitute the remaining 24.0% of Coca-Cola FEMSA’s capital stock.
Business Strategy
Coca-Cola FEMSA operates with a large geographic footprint in Latin America. In January 2015, Coca-Cola FEMSA restructured its operations under four new divisions: (1) Mexico (covering certain territories in Mexico); (2) Latin America (covering certain territories in Guatemala, and all of Nicaragua, Costa Rica and Panama, certain territories in Argentina, most of Colombia and all of Venezuela), (3) Brazil (covering a major part of the states of São Paulo and Minas Gerais, the states of Paraná and Mato Grosso do Sul and part of the states of Rio de Janeiro and Goiás), and (4) Asia (covering all of the Philippines through a joint venture with The Coca-Cola Company). Through these divisions, Coca-Cola FEMSA has created a more flexible structure to execute its strategies and continue with its track record of growth. Coca-Cola FEMSA has also aligned its business strategies more efficiently, ensuring a faster introduction of new products and categories, and a more rapid and effective design and deployment of commercial models.
One of Coca-Cola FEMSA’s goals is to maximize growth and profitability to create value for its shareholders. Coca-Cola FEMSA’s efforts to achieve this goal are based on: (1) transforming its commercial models to focus on its customers’ value potential and using a value-based segmentation approach to capture the industry’s value potential; (2) implementing multi-segmentation strategies in its major markets to target distinct market clusters divided by consumption occasion, competitive intensity and socioeconomic levels; (3) implementing well-planned product, packaging and pricing strategies through different distribution channels; (4) driving product innovation along its different product categories; (5) developing new businesses and distribution channels; and (6) achieving the full operating potential of its commercial models and processes to drive operational efficiencies throughout its company. In furtherance of these efforts, Coca-Cola FEMSA intends to continue to focus on, among other initiatives, the following:
working with The Coca-Cola Company to develop a business model to continue exploring and participating in new lines of beverages, extending existing product lines and effectively advertising and marketing its products;
developing and expanding its still beverage portfolio through innovation, strategic acquisitions and by entering into agreements to acquire companies with The Coca-Cola Company;
expanding its bottled water strategy with The Coca-Cola Company through innovation and selective acquisitions to maximize profitability across its market territories;
strengthening its selling capabilities and go-to-market strategies, including pre-sale, conventional selling and hybrid routes, in order to get closer to its clients and help them satisfy the beverage needs of consumers;
• | implementing selective packaging strategies designed to increase consumer demand for its products and to build a strong returnable base for theCoca-Cola brand; |
replicating its best practices throughout the value chain;
rationalizing and adapting its organizational and asset structure in order to be in a better position to respond to a changing competitive environment;
building a multi-cultural collaborative team, from top to bottom; and
broadening its geographic footprint through organic growth and strategic joint ventures, mergers and acquisitions.
Coca-Cola FEMSA seeks to increase per capita consumption of its products in the territories in which it operates. To that end, Coca-Cola FEMSA’s marketing teams continuously develop sales strategies tailored to the different characteristics of its various territories and distribution channels. Coca-Cola FEMSA continues to develop its product portfolio to better meet market demand and maintain its overall profitability. To stimulate and respond to consumer demand, Coca-Cola FEMSA continues to introduce new categories, products and presentations.See “—Product and Packaging Mix.” In addition, because Coca-Cola FEMSA views its relationship with The Coca-Cola Company as integral to its business, Coca-Cola FEMSA uses market information systems and strategies developed with The Coca-Cola Company to improve its business and marketing strategies.See “—Marketing.”
Coca-Cola FEMSA also continuously seeks to increase productivity in its facilities through infrastructure and process reengineering for improved asset utilization. Coca-Cola FEMSA’s capital expenditure program includes investments in production and distribution facilities, bottles, cases, coolers and information systems. Coca-Cola FEMSA believes that this program will allow it to maintain its capacity and flexibility to innovate and to respond to consumer demand for its products.
In early 2015, Coca-Cola FEMSA redesigned its corporate structure to strengthen the core functions of its organization. Through this restructuring, Coca-Cola FEMSA created specialized departments, focused on its supply chain, commercial, and IT innovation areas (centros de excelencia). These departments not only enable centralized collaboration and knowledge sharing, but also drive standards of excellence and best practices in Coca-Cola FEMSA’s key strategic capabilities. Coca-Cola FEMSA’s priorities include enhanced manufacturing efficiency, improved distribution and logistics, and cutting-edge IT-enabled commercial innovation.
Coca-Cola FEMSA focuses on management quality as a key element of its growth strategy and remains committed to fostering the development of quality management at all levels. Coca-Cola FEMSA’s Strategic Talent Management Model is designed to enable it to reach its full potential by developing the capabilities of its employees and executives. This holistic model works to build the skills necessary for Coca-Cola FEMSA’s employees and executives to reach their maximum potential, while contributing to the achievement of its short- and long-term objectives. To support this capability development model, Coca-Cola FEMSA’s board of directors has allocated a portion of its yearly operating budget to fund these management training programs.
Sustainable development is a comprehensive part of Coca-Cola FEMSA’s strategic framework for business operation and growth. Coca-Cola FEMSA bases its efforts in its core foundation, its ethics and values. Coca-Cola FEMSA focuses on three core areas, (i) its people, by encouraging the comprehensive development of its employees and their families; (ii) its communities, by promoting the generation of sustainable communities in which it serves, an attitude of health, self-care, adequate nutrition and physical activity, and evaluating the impact of its value chain; and (iii) the planet, by establishing guidelines that it believes will result in efficient use of natural resources to minimize the impact that its operations might have on the environment and create a broader awareness of caring for the environment.
CCFPI Joint Venture
On January 25, 2013, as part of Coca-Cola FEMSA’s efforts to expand its geographic reach, it acquired a 51% non-controlling majority stake in CCFPI. Coca-Cola FEMSA currently manages the day-to-day operations of the business; however, during a four-year period ending January 25, 2017 the business plan and other operational decisions must be approved jointly with The Coca-Cola Company. As of December 31, 2014, Coca-Cola FEMSA’s investment under the equity method in CCFPI was Ps. 9,021 million. See Notes 10 and 26 to our audited consolidated financial statements. Coca-Cola FEMSA’s product portfolio in the Philippines consists ofCoca-Cola trademark beverages and Coca-Cola FEMSA’s total sales volume in 2014 reached 513 million unit cases. The operations of CCFPI are comprised of 19 production plants and serve close to 853,242 customers.
The Philippines has one of the highest per capita consumption rates ofCoca-Cola products in the region and presents significant opportunities for further growth.Coca-Cola has been present in the Philippines since the start of the 20th century and since 1912 it has been locally producingCoca-Colaproducts. The Philippines received the first Coca-Cola bottling and distribution franchise in Asia. Coca-Cola FEMSA’s strategic framework for growth in the Philippines is based on three pillars: portfolio, route to market and supply chain.
Coca-Cola FEMSA’s Territories
The following map shows Coca-Cola FEMSA’s territories, giving estimates in each case of the population to which it offer products, the number of retailers of its beverages and the per capita consumption of its beverages as of December 31, 2014:
Per capita consumption data for a territory is determined by dividing total beverage sales volume within the territory (in unit cases) by the estimated population within such territory, and is expressed on the basis of the number of eight-ounce servings of Coca-Cola FEMSA’s products consumed annually per capita. In evaluating the development of local volume sales in Coca-Cola FEMSA’s territories and to determine product potential, Coca-Cola FEMSA and The Coca-Cola Company measure, among other factors, the per capita consumption of all their beverages.
Coca-Cola FEMSA’s Products
Coca-Cola FEMSA produces, markets, sells and distributesCoca-Cola trademark beverages. TheCoca-Cola trademark beverages include: sparkling beverages (colas and flavored sparkling beverages), waters and still beverages (including juice drinks, coffee, teas, milk, value-added dairy and isotonic drinks). The following table sets forth Coca-Cola FEMSA’s main brands as of December 31, 2014:
Colas: | Mexico and Central America(1) | South America(2) | Venezuela | |||
Coca-Cola | ü | ü | ü | |||
Coca-Cola Light | ü | ü | ü | |||
Coca-Cola Zero | ü | ü | ||||
Coca-Cola Life | ü | ü | ||||
Flavored sparkling beverages: | Mexico and Central America(1) | South America(2) | Venezuela | |||
Ameyal | ü | |||||
Canada Dry | ü | |||||
Chinotto | ü | |||||
Crush | ü | |||||
Escuis | ü | |||||
Fanta | ü | ü | ||||
Fresca | ü | |||||
Frescolita | ü | ü | ||||
Hit | ü | |||||
Kist | ü | |||||
Kuat | ü | |||||
Lift | ü | |||||
Mundet | ü | |||||
Quatro | ü | |||||
Schweppes | ü | ü | ü | |||
Simba | ü | |||||
Sprite | ü | ü | ||||
Victoria | ü | |||||
Yoli | ü | |||||
Water: | Mexico and Central America(1) | South America(2) | Venezuela | |||
Alpina | ü | |||||
Aquarius(3) | ü | |||||
Bonaqua | ü | |||||
Brisa | ü | |||||
Ciel | ü | |||||
Crystal | ü | |||||
Dasani | ü | |||||
Manantial | ü | |||||
Nevada | ü | |||||
Other Categories: | Mexico and Central America(1) | South America(2) | Venezuela | |||
Cepita(4) | ü | |||||
Del Prado(5) | ü | |||||
Estrella Azul(6) | ü | |||||
FUZE Tea | ü | ü | ||||
Hi-C(7) | ü | ü | ||||
Santa Clara(8) | ü | |||||
Jugos del Valle(4) | ü | ü | ü | |||
Matte Leão(9) | ü | |||||
Powerade(10) | ü | ü | ü | |||
Valle Frut(11) | ü | ü | ü |
(1) | Includes Mexico, Guatemala, Nicaragua, Costa Rica and Panama. |
(2) | Includes Colombia, Brazil and Argentina. |
(3) | Flavored water. In Brazil, also a flavored sparkling beverage. |
(4) | Juice-based beverage. |
(5) | Juice-based beverage in Central America. |
(6) | Milk and value-added dairy and juices. |
(7) | Juice-based beverage. Includes Hi-C Orangeade in Argentina. |
(8) | Milk, value-added dairy and coffee. |
(9) | Ready to drink tea. |
(10) | Isotonic drinks. |
(11) | Orangeade. IncludesDel Valle Freshin Costa Rica, Nicaragua, Panama, Colombia and Venezuela. |
Sales Overview
Coca-Cola FEMSA measures total sales volume in terms of unit cases. “Unit case” refers to 192 ounces of finished beverage product (24 eight-ounce servings) and, when applied to soda fountains, refers to the volume of syrup, powders and concentrate that is required to produce 192 ounces of finished beverage product. The following table illustrates Coca-Cola FEMSA’s historical sales volume for each of its consolidated territories.
Year Ended December 31, | ||||||||||||
2014 | 2013 (1) | 2012(2) | ||||||||||
(millions of unit cases) | ||||||||||||
Mexico and Central America | ||||||||||||
Mexico | 1,754.9 | 1,798.0 | 1,720.3 | |||||||||
Central America(3) | 163.6 | 155.6 | 151.2 | |||||||||
South America (excluding Venezuela) | ||||||||||||
Colombia | 298.4 | 275.7 | 255.8 | |||||||||
Brazil(4) | 733.5 | 525.2 | 494.2 | |||||||||
Argentina | 225.8 | 227.1 | 217.0 | |||||||||
Venezuela | 241.1 | 222.9 | 207.7 | |||||||||
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Consolidated Volume | 3,417.3 | 3,204.5 | 3,046.2 |
(1) | Includes volume from the operations of Grupo Yoli from June 2013, Companhia Fluminense from September 2013 and Spaipa from November 2013. |
(2) | Includes volume from the operations of Grupo Fomento Queretano from May 2012. |
(3) | Includes Guatemala, Nicaragua, Costa Rica and Panama. |
(4) | Excludes beer sales volume. |
Product and Packaging Mix
Out of the more than 116 brands and line extensions of beverages that Coca-Cola FEMSA sells and distributes, Coca-Cola FEMSA’s most important brand, Coca-Cola, together with its line extensions,Coca-Cola Light,Coca-Cola Lifeand Coca-Cola Zero, accounted for 61.0% of total sales volume in 2014. Coca-Cola FEMSA’s next largest brands,Ciel(a water brand from Mexico and its line extensions),Fanta (and its line extensions),Sprite (and its line extensions) andValleFrut (and its line extensions) accounted for 11.6%, 5.1%, 2.8% and 2.7%, respectively, of total sales volume in 2014. Coca-Cola FEMSA uses the term line extensions to refer to the different flavors in which it offers its brands. Coca-Cola FEMSA produces, markets, sells and distributesCoca-Cola trademark beverages in each of its territories in containers authorized by The Coca-Cola Company, which consist of a variety of returnable and non-returnable presentations in the form of glass bottles, cans and plastic bottles mainly made of polyethylene terephthalate, which we refer to as PET.
Coca-Cola FEMSA uses the term presentation to refer to the packaging unit in which it sells its products. Presentation sizes for Coca-Cola FEMSA’sCoca-Cola trademark beverages range from a 6.5-ounce personal size to a 3-liter multiple serving size. For all of Coca-Cola FEMSA’s products excluding water, Coca-Cola FEMSA considers a multiple serving size as equal to, or larger than, 1.0 liter. In general, personal sizes have a higher price per unit case as compared to multiple serving sizes. Coca-Cola FEMSA offers both returnable and non-returnable
presentations, which allow it to offer portfolio alternatives based on convenience and affordability to implement revenue management strategies and to target specific distribution channels and population segments in its territories. In addition, Coca-Cola FEMSA sells someCoca-Cola trademark beverage syrups in containers designed for soda fountain use, which we refer to as fountain. Coca-Cola FEMSA also sells bottled water products in bulk sizes, which refer to presentations equal to or larger than 5.0 liters, which have a much lower average price per unit case than its other beverage products.
The characteristics of Coca-Cola FEMSA’s territories are very diverse. Central Mexico and Coca-Cola FEMSA’s territories in Argentina are densely populated and have a large number of competing beverage brands as compared to the rest of its territories. Coca-Cola FEMSA’s territories in Brazil are densely populated but have lower per capita consumption of beverage products as compared to Mexico. Portions of southern Mexico, Central America and Colombia are large and mountainous areas with lower population density, lower per capita income and lower per capita consumption of beverages. In Venezuela, Coca-Cola FEMSA faces operational disruptions from time to time, which may have an effect on its volumes sold, and consequently, may result in lower per capita consumption.
The following discussion analyzes Coca-Cola FEMSA’s product and packaging mix by its consolidated reporting segments. The volume data presented is for the years 2014, 2013 and 2012.
Mexico and Central America. Coca-Cola FEMSA’s product portfolio consists ofCoca-Cola trademark beverages, including theJugos del Valle line of juice-based beverages.Per capita consumption of Coca-Cola FEMSA’s beverage products in Mexico and Central America was 607.5 and 189.1 eight-ounce servings, respectively, in 2014.
The following table highlights historical sales volume and mix in Mexico and Central America for Coca-Cola FEMSA’s products:
Year Ended December 31, | ||||||||||||
2014 | 2013(1) | 2012(2) | ||||||||||
Total Sales Volume | ||||||||||||
Total (millions of unit cases) | 1,918.5 | 1,953.6 | 1,871.5 | |||||||||
Growth (%) | (1.8 | ) | 4.4 | 23.9 | ||||||||
(in percentages) | ||||||||||||
Unit Case Volume Mix by Category | ||||||||||||
Sparkling beverages | 73.2 | 73.1 | 73.0 | |||||||||
Water(3) | 21.3 | 21.2 | 21.4 | |||||||||
Still beverages | 5.5 | 5.7 | 5.6 | |||||||||
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Total | 100.0 | 100.0 | 100.0 | |||||||||
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(1) | Includes volume from the operations of Grupo Yoli from June 2013. |
(2) | Includes volume from the operations of Grupo Fomento Queretano from May 2012. |
(3) | Includes bulk water volumes. |
In 2014, multiple serving presentations represented 64.5% of total sparkling beverages sales volume in Mexico, a 170 basis points decrease compared to 2013; and 54.7% of total sparkling beverages sales volume in Central America, a 16 basis points decrease compared to 2013. Coca-Cola FEMSA’s strategy is to foster consumption of single serve presentations while maintaining multiple serving volumes. In 2014, returnable packaging, as a percentage of total sparkling beverage sales volume accounted for 37.9% in Mexico, a 290 basis points increase as compared to 2013; and 34.8% in Central America, a 1,160 basis points increase as compared to 2013.
In 2014, Coca-Cola FEMSA’s sparkling beverages volume as a percentage of total sales volume in its Mexico and Central America division increased marginally to 73.2% as compared with 2013.
Total sales volume in Coca-Cola FEMSA’s Mexico and Central America division (including Grupo Yoli) reached 1,918.5 million unit cases in 2014, a decrease of 1.8% compared to 1,953.6 million unit cases in 2013. The sales volume for Coca-Cola FEMSA’s sparkling beverage category decreased 1.6%, mainly driven by the impact of price increase to compensate the excise tax to sweetened beverages. Coca-Cola FEMSA’s bottled water portfolio, excluding bulk water, grew 4.2%, mainly driven by the performance of theCiel brand in Mexico. Coca-Cola FEMSA’s still beverage category decreased 5.5% mainly due to the performance of the Jugos del Valle portfolio in the division. Organically, excluding the non-comparable effect of Grupo Yoli in 2014, total sales volume for Mexico and Central America division reached 1,878.9 million unit cases in 2014, a decrease of 3.8% as compared to 2013. On the same basis, Coca-Cola FEMSA’s sparkling beverage category decreased 3.9%, its bottled water portfolio, excluding bulk water, remained flat, and its still beverage category decreased 7.1%.
In 2013, multiple serving presentations represented 66.2% of total sparkling beverages sales volume in Mexico (including Grupo Fomento Queretano and Grupo Yoli), a 10 basis points decrease compared to 2012; and 56.3% of total sparkling beverages sales volume in Central America, a 50 basis points increase compared to 2012. In 2013, returnable packaging, as a percentage of total sparkling beverage sales volume, accounted for 35.0% in Mexico (including Grupo Fomento Queretano and Grupo Yoli), a 160 basis points increase compared to 2012; and 23.2% in Central America, a 160 basis points decrease compared to 2012.
In 2013, Coca-Cola FEMSA’s sparkling beverages volume as a percentage of total sales volume in its Mexico and Central America division (including Grupo Fomento Queretano and Grupo Yoli) increased marginally to 73.1% as compared with 2012.
Total sales volume in Coca-Cola FEMSA’s Mexico and Central America division (including Grupo Fomento Queretano and Grupo Yoli) reached 1,953.6 million unit cases in 2013, an increase of 4.4% compared to 1,871.5 million unit cases in 2012. The integration of Grupo Fomento Queretano and Grupo Yoli in Mexico contributed 89.3 million unit cases in 2013 of which sparkling beverages were 72.2%, water was 9.9%, bulk water was 13.4% and still beverages were 4.5%. Excluding the integration of these territories, volume decreased 0.4% to 1,864.2 million unit cases. Organically, Coca-Cola FEMSA’s bottled water portfolio grew 5.1%, mainly driven by the performance of theCiel brand in Mexico. On the same basis, Coca-Cola FEMSA’s still beverage category grew 3.7% mainly due to the performance of the Jugos del Valle portfolio in the division. These increases partially compensated for the flat volumes in sparkling beverages and a 3.5% decline in the bulk water business.
South America (Excluding Venezuela). Coca-Cola FEMSA’s product portfolio in South America consists mainly ofCoca-Cola trademark beverages, including theJugos del Valle line of juice-based beverages in Colombia and Brazil, and theHeineken beer brands, includingKaiser beer brands, in Brazil, which we sell and distribute.
During 2013, as part of Coca-Cola FEMSA’s efforts to foster sparkling beverage per capita consumption in Brazil, it reinforced the 2.0-liter returnable plastic bottle for theCoca-Cola brand and introduced two single-serve 0.2 and 0.3 liter presentations. During 2014, in an effort to increase sales in its still beverage portfolio in the region, Coca-Cola FEMSA reinforced itsJugos del Valle line of business andPowerade brand. Per capita consumption of Coca-Cola FEMSA’s beverages in Colombia, Brazil and Argentina was 152.7, 244.2 and 470.4 eight-ounce servings, respectively, in 2014.
The following table highlights historical total sales volume and sales volume mix in South America (excluding Venezuela), not including beer:
Year Ended December 31, | ||||||||||||
2014 | 2013(1) | 2012 | ||||||||||
Total Sales Volume | ||||||||||||
Total (millions of unit cases) | 1,257.7 | 1,028.1 | 967.0 | |||||||||
Growth (%) | 22.6 | 6.3 | 2.0 | |||||||||
(in percentages) | ||||||||||||
Unit Case Volume Mix by Category | ||||||||||||
Sparkling beverages | 84.1 | 84.1 | 84.9 | |||||||||
Water(2) | 9.7 | 10.1 | 10.0 | |||||||||
Still beverages | 6.2 | 5.8 | 5.1 | |||||||||
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Total | 100.0 | 100.0 | 100.0 | |||||||||
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(1) | Includes volume from the operations of Companhia Fluminense from September 2013 and Spaipa from November 2013. |
(2) | Includes bulk water volume. |
Total sales volume in Coca-Cola FEMSA’s South America division, excluding Venezuela, increased 22.6% to 1,257.7 million unit cases in 2014 as compared to 2013, as a result of stronger sales volumes in its recently integrated territories in Brazil and better volume performance in Colombia. The still beverage category grew 31.8%, mainly driven by the Jugos del Valle line of business in Colombia and Brazil and the performance ofFUZE tea andLeão tea in the division. Coca-Cola FEMSA’s sparkling portfolio increased 22.6% mainly driven by the performance of theCoca-Cola brand and other core products in its operations. Coca-Cola FEMSA’s bottled water portfolio, including bulk water, increased 16.9% driven by performance of theBonaqua brand in Argentina and theCrystalbrand in Brazil. Organically, excluding the non-comparable effect of Companhia Fluminense and Spaipa in 2014, total sales volume in South America division excluding Venezuela, increased 3.7% as compared to 2013. On the same basis, Coca-Cola FEMSA’s still beverage category grew 15.3% mainly driven by the Jugos del Valle line of business in the region, its bottled water portfolio, including bulk water, increased 6.9% mainly driven by the performance of theCrystal brand in Brazil, and its sparkling beverage category increased 2.5%.
In 2014, returnable packaging, as a percentage of total sparkling beverage sales volume, accounted for 32.0% in Colombia, a decrease of 520 basis points as compared to 2013; 19.7% in Argentina, a decrease of 230 basis points and 15.5% in Brazil a 50 basis points decrease compared to 2013. In 2014, multiple serving presentations represented 69.8%, 85.3% and 75.0% of total sparkling beverages sales volume in Colombia, Argentina and Brazil, respectively.
Total sales volume in Coca-Cola FEMSA’s South America division, excluding Venezuela, increased 6.3% to 1,028.1 million unit cases in 2013 as compared to 2012, as a result of growth in Colombia and Argentina and the integration of Companhia Fluminense and Spaipa in its Brazilian territories. These effects compensated for an organic volume decline in Brazil. Organically, excluding the non-comparable effect of Companhia Fluminense and Spaipa, volumes remained flat as compared with the previous year. On the same basis, the still beverage category grew 14.3%, mainly driven by the Jugos del Valle line of business in Colombia and Brazil and the performance ofFUZE tea in the division. Coca-Cola FEMSA’s bottled water portfolio, including bulk water, increased 3.8% mainly driven by theBonaqua brand in Argentina and theBrisa brand in Colombia. These increases compensated for a 1.2% decline in the sparkling beverage portfolio.
In 2013, returnable packaging, as a percentage of total sparkling beverage sales volume, accounted for 37.2% in Colombia, a decrease of 320 basis points as compared to 2012; 22.0% in Argentina, a decrease of 690 basis points and 16.0% in Brazil, excluding the non-comparable effect of Companhia Fluminense and Spaipa, a 170 basis points increase compared to 2012. In 2013, multiple serving presentations represented 66.7%, 85.2% and 72.9% of total sparkling beverages sales volume in Colombia, Argentina and Brazil on an organic basis, respectively.
Coca-Cola FEMSA continues to distribute and sell theHeineken beer portfolio, includingKaiser beer brands, in its Brazilian territories through the 20-year term, consistent with the arrangements in place since 2006 with Cervejarias Kaiser, a subsidiary of the Heineken Group. Beginning in the second quarter of 2005, Coca-Cola FEMSA ceased including beer that it distributes in Brazil in its reported sales volumes.
Venezuela. Coca-Cola FEMSA’s product portfolio in Venezuela consists ofCoca-Cola trademark beverages. Per capita consumption of Coca-Cola FEMSA’s beverages in Venezuela during 2014 was 190.0 eight-ounce servings. At the end of 2011, Coca-Cola FEMSA launchedDel Valle Fresh, an orangeade, in Venezuela, which contributed significantly to incremental volume growth in this country during 2012. During 2014, Coca-Cola FEMSA’s Poweradebrand in the country contributed to its sales growth in the still beverage category.
The following table highlights historical total sales volume and sales volume mix in Venezuela:
Year Ended December 31, | ||||||||||||
2014 | 2013 | 2012 | ||||||||||
Total Sales Volume | ||||||||||||
Total (millions of unit cases) | 241.1 | 222.9 | 207.7 | |||||||||
Growth (%) | 8.2 | 7.3 | 9.4 | |||||||||
(in percentages) | ||||||||||||
Unit Case Volume Mix by Category | ||||||||||||
Sparkling beverages | 85.7 | 85.6 | 87.9 | |||||||||
Water(1) | 6.5 | 6.9 | 5.6 | |||||||||
Still beverages | 7.8 | 7.5 | 6.5 | |||||||||
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Total | 100.0 | 100.0 | 100.0 | |||||||||
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(1) | Includes bulk water volume. |
Coca-Cola FEMSA has implemented a product portfolio rationalization strategy that allows it to minimize the impact of certain operating disruptions that have been recurrent in Venezuela over the last several years related to difficulties in accessing raw materials due to the delay in obtaining the corresponding import authorizations. In addition, from time to time, Coca-Cola FEMSA experiences operating disruptions due to prolonged negotiations of collective bargaining agreements.
Despite these difficulties, total sales volume increased 8.2% to 241.1 million unit cases in 2014, as compared to 222.9 million unit cases in 2013. The sales volume in the sparkling beverage category grew 8.3%, driven by the strong performance of theCoca-Cola brand, which grew 15.3%. The bottled water business, including bulk water, grew 1.6% mainly driven by theNevada brand. The still beverage category increased 10.8%, due to the performance of theDel Valle Fresh orangeade andPoweradebrand.
In 2014, multiple serving presentations represented 81.9% of total sparkling beverages sales volume in Venezuela, a 100 basis points increase as compared to 2013. In 2014, returnable presentations represented 6.9% of total sparkling beverages sales volume in Venezuela, a 20 basis points increase as compared to 2013.
Total sales volume increased 7.3% to 222.9 million unit cases in 2013, as compared to 207.7 million unit cases in 2012. The sales volume in the sparkling beverage category grew 4.5%, driven by the strong performance of theCoca-Cola brand, which grew 10.0%. The bottled water business, including bulk water, grew 33.2% mainly driven by theNevada brand. The still beverage category increased 23.5%, due to the performance of theDel Valle Fresh orangeade andKapo.
In 2013, multiple serving presentations represented 80.9% of total sparkling beverages sales volume in Venezuela, a 100 basis points increase compared to 2012. In 2013, returnable presentations represented 6.8% of total sparkling beverages sales volume in Venezuela, an 80 basis points decrease compared to 2012.
Seasonality
Sales of Coca-Cola FEMSA’s products are seasonal, as its sales levels generally increase during the summer months of each country and during the Christmas holiday season. In Mexico, Central America, Colombia and Venezuela, Coca-Cola FEMSA typically achieves its highest sales during the summer months of April through September as well as during the Christmas holidays in December. In Brazil and Argentina, Coca-Cola FEMSA’s highest sales levels occur during the summer months of October through March and the Christmas holidays in December.
Marketing
Coca-Cola FEMSA, in conjunction with The Coca-Cola Company, has developed a marketing strategy to promote the sale and consumption of its products. Coca-Cola FEMSA relies extensively on advertising, sales promotions and retailer support programs to target the particular preferences of its consumers. Coca-Cola FEMSA’s consolidated marketing expenses in 2014, net of contributions by The Coca-Cola Company, were Ps. 3,488 million. The Coca-Cola Company contributed an additional Ps. 4,118 million in 2014, which mainly includes contributions for coolers, bottles and cases. Through the use of advanced information technology, Coca-Cola FEMSA has collected customer and consumer information that allow it to tailor its marketing strategies to target different types of customers located in each of its territories and to meet the specific needs of the various markets it serves.
Retailer Support Programs. Support programs include providing retailers with point-of-sale display materials and consumer sales promotions, such as contests, sweepstakes and the giveaway of product samples.
Coolers. Coolers play an integral role in Coca-Cola FEMSA’s clients’ plans for success. Increasing both cooler coverage and the number of cooler doors among its retailers is important to ensure that Coca-Cola FEMSA’s wide variety of products are properly displayed, while strengthening its merchandising capacity in the traditional sales channel to significantly improve its point-of-sale execution.
Advertising. Coca-Cola FEMSA advertises in all major communications media. Coca-Cola FEMSA focuses its advertising efforts on increasing brand recognition by consumers and improving its customer relations. National advertising campaigns are designed and proposed by The Coca-Cola Company’s local affiliates in the countries in which Coca-Cola FEMSA operates, with Coca-Cola FEMSA’s input at the local or regional level. Point-of-sale merchandising and advertising efforts are proposed and implemented by Coca-Cola FEMSA, with a focus on increasing its connection with customers and consumers.
Channel Marketing. In order to provide more dynamic and specialized marketing of its products, Coca-Cola FEMSA’s strategy is to classify its markets and develop targeted efforts for each consumer segment or distribution channel. Coca-Cola FEMSA’s principal channels are small retailers, “on-premise” consumption such as restaurants and bars, supermarkets and third party distributors. Presence in these channels entails a comprehensive and detailed analysis of the purchasing patterns and preferences of various groups of beverage consumers in each of the different types of locations or distribution channels. In response to this analysis, Coca-Cola FEMSA tailors its product, price, packaging and distribution strategies to meet the particular needs of and exploit the potential of each channel.
Multi-Segmentation. Coca-Cola FEMSA has implemented a multi-segmentation strategy in all of its markets. These strategies consist of the implementation of different product/price/package portfolios by market cluster or group. These clusters are defined based on consumption occasion, competitive intensity and socio-economic levels, rather than solely on the types of distribution channels.
Client Value Management. Coca-Cola FEMSA continues transforming its commercial models to focus on its customers’ value potential using a value-based segmentation approach to capture the industry’s potential. Coca-Cola FEMSA started the rollout of this new model in its Mexico, Central America, Colombia and Brazil operations in 2009. As of the end of 2014, Coca-Cola FEMSA has covered the totality of the volumes in every operation except for Venezuela (where Coca-Cola FEMSA has partially covered the volumes) and the recently integrated franchises of Companhia Fluminense and Spaipa in Brazil.
Coca-Cola FEMSA believes that the implementation of these strategies described above also enables it to respond to competitive initiatives with channel-specific responses as opposed to market-wide responses. In addition, it allows Coca-Cola FEMSA to be more efficient in the way it goes to market and invests its marketing resources in those segments that could provide a higher return. Coca-Cola FEMSA’s marketing, segmentation and distribution activities are facilitated by its management information systems. Coca-Cola FEMSA has invested significantly in creating these systems, including in hand-held computers to support the gathering of product, consumer and delivery information for most of the sales routes throughout its territories.
Product Sales and Distribution
The following table provides an overview of Coca-Cola FEMSA’s distribution centers and the retailers to which it sells its products:
As of December 31, 2014 | ||||||||||||
Mexico and Central America(1) | South America(2) | Venezuela | ||||||||||
Distribution centers | 176 | 66 | 33 | |||||||||
Retailers(3) | 955,383 | 814,864 | 181,605 |
(1) | Includes Mexico, Guatemala, Nicaragua, Costa Rica and Panama. |
(2) | Includes Colombia, Brazil and Argentina. |
(3) | Estimated. |
Coca-Cola FEMSA continuously evaluates its distribution model in order to fit with the local dynamics of the marketplace and analyze the way it goes to market, recognizing different service needs from its customers, while looking for a more efficient distribution model. As part of this strategy, Coca-Cola FEMSA is rolling out a variety of new distribution models throughout its territories looking for improvements in its distribution network.
Coca-Cola FEMSA uses several sales and distribution models depending on market, geographic conditions and the customer’s profile: (1) the pre-sale system, which separates the sales and delivery functions, permitting trucks to be loaded with the mix of products that retailers have previously ordered, thereby increasing both sales and distribution efficiency, (2) the conventional truck route system, in which the person in charge of the delivery makes immediate sales from inventory available on the truck, (3) a hybrid distribution system, where the same truck carries product available for immediate sale and product previously ordered through the pre-sale system, (4) the telemarketing system, which could be combined with pre-sales visits and (5) sales through third-party wholesalers of Coca-Cola FEMSA’s products.
As part of the pre-sale system, sales personnel also provide merchandising services during retailer visits, which Coca-Cola FEMSA believes enhance the shopper experience at the point of sale. Coca-Cola FEMSA believes that an adequate number of service visits to retailers and frequency of deliveries are essential elements in an effective selling and distribution system for its products.
Coca-Cola FEMSA’s distribution centers range from large warehousing facilities and re-loading centers to small deposit centers. In addition to Coca-Cola FEMSA’s fleet of trucks, Coca-Cola FEMSA distributes its products in certain locations through electric carts and hand-trucks in order to comply with local environmental and traffic regulations. In some of Coca-Cola FEMSA’s territories, it retains third parties to transport its finished products from the bottling plants to the distribution centers.
Mexico. Coca-Cola FEMSA contracts with one of our subsidiaries for the transportation of finished products to its distribution centers from its production facilities. From the distribution centers, Coca-Cola FEMSA then distributes its finished products to retailers through its own fleet of trucks.
In Mexico, Coca-Cola FEMSA sells a majority of its beverages at small retail stores to consumers who may take the beverages for consumption at home or elsewhere. Coca-Cola FEMSA also sells products through the “on-premise” consumption segment, supermarkets and other locations. The “on-premise” consumption segment consists of sales through sidewalk stands, restaurants, bars and various types of dispensing machines as well as sales through point-of-sale programs in stadiums, concert halls, auditoriums and theaters.
Brazil. In Brazil, Coca-Cola FEMSA sold 33% of its total sales volume through modern distribution channels in 2014. Also in Brazil, Coca-Cola FEMSA distributes its finished products to retailers through a combination of its own fleet of trucks and third party distributors, while Coca-Cola FEMSA maintains control over the selling function. In designated zones in Brazil, third-party distributors purchase its products at a discount from the wholesale price and resell the products to retailers.
Territories other than Mexico and Brazil. Coca-Cola FEMSA distributes its finished products to retailers through a combination of its own fleet of trucks and third party distributors. In most of Coca-Cola FEMSA’s territories, an important part of its total sales volume is sold through small retailers, with low supermarket penetration.
Competition
Although Coca-Cola FEMSA believes that its products enjoy wider recognition and greater consumer loyalty than those of its principal competitors, the markets in the territories in which Coca-Cola FEMSA operates are highly competitive. Coca-Cola FEMSA’s principal competitors are localPepsi bottlers and other bottlers and distributors of national and regional beverage brands. Coca-Cola FEMSA faces increased competition in many of its territories from producers of low price beverages, commonly referred to as “B brands.” A number of Coca-Cola FEMSA’s competitors in Central America, Venezuela, Brazil and Argentina offer beer in addition to sparkling beverages, still beverages, and water, which may enable them to achieve distribution efficiencies.
Price discounting and packaging have joined consumer sales promotions, customer service and non-price retailer incentives as the primary means of competition among bottlers. Coca-Cola FEMSA competes by seeking to offer products at an attractive price in the different segments in its markets and by building on the value of its brands. Coca-Cola FEMSA believes that the introduction of new products and new presentations has been a significant competitive technique that allows it to increase demand for its products, provide different options to consumers and increase new consumption opportunities.See “—Product and Packaging Mix.”
Mexico and Central America. Coca-Cola FEMSA’s principal competitors in Mexico are bottlers ofPepsi products, whose territories overlap but are not co-extensive with its own. Coca-Cola FEMSA competes with Organización Cultiba, S.A.B. de C.V., a joint venture formed by Grupo Embotelladoras Unidas, S.A.B. de C.V., the formerPepsi bottler in central and southeast Mexico, a subsidiary of PepsiCo, and Empresas Polar, S.A., the leading beer distributor andPepsi bottler in Venezuela. Coca-Cola FEMSA’s main competition in the juice category in Mexico is Grupo Jumex. In the water category,Bonafont, a water brand owned by Grupo Danone, is Coca-Cola FEMSA’s main competition. In addition, Coca-Cola FEMSA competes with Cadbury Schweppes in sparkling beverages and with other national and regional brands in its Mexican territories, as well as “B brand” producers, such as Ajemex, S.A. de C.V. and Consorcio AGA, S.A. de C.V., that offer various presentations of sparkling and still beverages.
In the countries that comprise Coca-Cola FEMSA’s Central America region, its main competitors arePepsi andBig Cola bottlers. In Guatemala and Nicaragua, Coca-Cola FEMSA competes with a joint venture between AmBev and The Central American Bottler Corporation. In Costa Rica, Coca-Cola FEMSA’s principal competitor is Florida Bebidas S.A., subsidiary of Florida Ice and Farm Co. In Panama, Coca-Cola FEMSA’s main competitor is Cervecería Nacional, S.A. Coca-Cola FEMSA also faces competition from “B brands” offering multiple serving size presentations in some Central American countries.
South America (excluding Venezuela). Coca-Cola FEMSA’s principal competitor in Colombia is Postobón, a well-established local bottler that sells flavored sparkling beverages (under the brandsPostobón andColombiana), some of which have a wide consumption preference, such asmanzana Postobón (apple Postobón), which is the second most popular flavor in the Colombian sparkling beverage industry in terms of total sales volume. Postobón also sellsPepsi products. Postobón is a vertically integrated producer, the owners of which hold other significant commercial interests in Colombia. Coca-Cola FEMSA also competes with low-price producers, such as the producers ofBig Cola, which principally offer multiple serving size presentations in the sparkling and still beverage industry.
In Brazil, Coca-Cola FEMSA competes against AmBev, a Brazilian company with a portfolio of brands that includesPepsi, local brands with flavors such as guaraná, and proprietary beer brands. Coca-Cola FEMSA also competes against “B brands” or “Tubainas,” which are small, local producers of low-cost flavored sparkling beverages that represent a significant portion of the sparkling beverage market.
In Argentina, Coca-Cola FEMSA’s main competitor is Buenos Aires Embotellador S.A., or BAESA, aPepsi bottler, which is owned by Argentina’s principal brewery, Quilmes Industrial S.A., and indirectly controlled by AmBev. In addition, Coca-Cola FEMSA competes with a number of competitors offering generic, low-priced sparkling beverages as well as many other generic products and private label proprietary supermarket brands.
Venezuela. In Venezuela, Coca-Cola FEMSA’s main competitor is Pepsi-Cola Venezuela, C.A., a joint venture formed between PepsiCo and Empresas Polar, S.A., the leading beer distributor in the country. Coca-Cola FEMSA also competes with the producers ofBig Cola in part of this country.
Raw Materials
Pursuant to its bottler agreements, Coca-Cola FEMSA is authorized to manufacture, sell and distributeCoca-Cola trademark beverages within specific geographic areas, and Coca-Cola FEMSA is required to purchase in all of its territories for allCoca-Cola trademark beverages concentrate from companies designated by The Coca-Cola Company and sweeteners from companies authorized by The Coca-Cola Company. Concentrate prices forCoca-Cola trademark beverages are determined as a percentage of the weighted average retail price in local currency net of applicable taxes. Although The Coca-Cola Company has the right to unilaterally set the price of concentrates, in practice this percentage has historically been set pursuant to periodic negotiations with The Coca-Cola Company.
In the past, The Coca-Cola Company has increased concentrate prices forCoca-Cola trademark beverages in some of the countries in which Coca-Cola FEMSA operates. In 2014, The Coca-Cola Company informed Coca-Cola FEMSA that it will gradually increase concentrate prices for certainCoca-Cola trademark beverages over a five year period in Costa Rica and Panama beginning in 2014. Based on Coca-Cola FEMSA’s estimates, it currently does not expect these increases to have a material adverse effect on its results of operation. Most recently, The Coca-Cola Company also informed Coca-Cola FEMSA that it will gradually increase concentrate prices for flavored water over a four year period in Mexico beginning in April 2015. The Coca-Cola Company may unilaterally increase concentrate prices again in the future and Coca-Cola FEMSA may not be successful in negotiating or implementing measures to mitigate the negative effect this may have in the prices of its products or its results.See “Item 10. Additional Information—Material Contracts—Material Contracts Relating to Coca-Cola FEMSA—Cooperation Framework with The Coca-Cola Company.”
In addition to concentrate, Coca-Cola FEMSA purchases sweeteners, carbon dioxide, resin and preforms to make plastic bottles, finished plastic and glass bottles, cans, caps and fountain containers, as well as other packaging materials and raw materials. Sweeteners are combined with water to produce basic syrup, which is added to the concentrate as the sweetener for most of Coca-Cola FEMSA’s beverages. Coca-Cola FEMSA’s bottler agreements provide that, with respect toCoca-Colatrademark beverages, these materials may be purchased only from suppliers approved by The Coca-Cola Company, including certain of our affiliates. Prices for packaging materials and HFCS historically have been determined with reference to the U.S. dollar, although the local currency equivalent in a particular country is subject to price volatility in accordance with changes in exchange rates. Coca-Cola FEMSA’s most significant packaging raw material costs arise from the purchase of resin, plastic preforms to make plastic bottles and finished plastic bottles, which Coca-Cola FEMSA obtains from international and local producers. The prices of these materials are related to crude oil prices and global resin supply. In recent years Coca-Cola FEMSA has experienced volatility in the prices we pay for these materials. Across its territories, Coca-Cola FEMSA’s average price for resin in U.S. dollars decreased 4.6% in 2014 as compared to 2013.
Under Coca-Cola FEMSA’s agreements with The Coca-Cola Company, it may use raw or refined sugar or HFCS as sweeteners in its products. Sugar prices in all of the countries in which Coca-Cola FEMSA operates, other than Brazil, are subject to local regulations and other barriers to market entry that cause Coca-Cola FEMSA to pay in excess of international market prices for sugar in certain countries. In recent years, international sugar prices experienced significant volatility. Across Coca-Cola FEMSA’s territories, its average price for sugar in U.S. dollars decreased approximately 1.7% in 2014 as compared to 2013.
Coca-Cola FEMSA categorizes water as a raw material in its business. Coca-Cola FEMSA obtains water for the production of some of its natural spring water products, such asManantialin Colombia andCrystal in Brazil, from spring water pursuant to concessions granted.
None of the materials or supplies that Coca-Cola FEMSA uses is presently in short supply, although the supply of specific materials could be adversely affected by strikes, weather conditions, governmental controls, national emergency situations, water shortages or the failure to maintain its existing water concessions.
Mexico and Central America. In Mexico, Coca-Cola FEMSA purchases its returnable plastic bottles from Graham Packaging México, S.A. de C.V., known as Graham, which is the exclusive supplier of returnable plastic bottles for The Coca-Cola Company and its bottlers in Mexico. Coca-Cola FEMSA mainly purchases resin from Indorama Ventures Polymers México, S. de R.L. de C.V. (formerly Arteva Specialties, S. de R.L. de C.V.), M. & G. Polímeros México, S.A. de C.V. and DAK Resinas Americas Mexico, S.A. de C.V., which Alpla México, S.A. de C.V., known as Alpla, and Envases Universales de México, S.A.P.I. de C.V. manufacture into non-returnable plastic bottles for Coca-Cola FEMSA.
Coca-Cola FEMSA purchases all its cans from Fábricas de Monterrey, S.A. de C.V. and Envases Universales de México, S.A.P.I. de C.V., through Promotora Mexicana de Embotelladoras, S.A. de C.V., known as PROMESA, a cooperative ofCoca-Cola bottlers, in which, as of April 10, 2015, Coca-Cola FEMSA held a 35.0% equity interest. Coca-Cola FEMSA mainly purchases its glass bottles from EXCO Integral Services, S.A. de C.V. (formerly Compañía Vidriera, S.A. de C.V.), FEVISA Industrial, S.A. de C.V., and Glass & Silice, S.A. de C.V.
Coca-Cola FEMSA purchases sugar from, among other suppliers, PIASA and Beta San Miguel, S.A. de C.V., both sugar cane producers in which, as of April 10, 2015, Coca-Cola FEMSA held a 36.3% and 2.7% equity interest, respectively. Coca-Cola FEMSA purchases HFCS from Ingredion México, S.A. de C.V., Almidones Mexicanos, S.A. de C.V. and Cargill de México, S.A. de C.V.
Sugar prices in Mexico are subject to local regulations and other barriers to market entry that cause Coca-Cola FEMSA to pay higher prices than those paid in the international market. As a result, prices in Mexico have no correlation to international market prices. In 2014, sugar prices in Mexico decreased approximately 7.0% as compared to 2013.
In Central America, the majority of Coca-Cola FEMSA’s raw materials such as glass and plastic bottles are purchased from several local suppliers. Coca-Cola FEMSA purchases all of its cans from PROMESA. Sugar is available from suppliers that represent several local producers. In Costa Rica, Coca-Cola FEMSA acquires plastic non-returnable bottles from Alpla C.R. S.A., and in Nicaragua Coca-Cola FEMSA acquires such plastic bottles from Alpla Nicaragua, S.A.
South America (excluding Venezuela). In Colombia, Coca-Cola FEMSA uses sugar as a sweetener in most of its products, which it buys from several domestic sources. Coca-Cola FEMSA purchases plastic bottles from Amcor Rigid Plastics de Colombia, S.A. and Tapón Corona de Colombia S.A. Coca-Cola FEMSA has historically purchased all of its glass bottles from Peldar O-I; however, it has engaged new suppliers and has recently acquired glass bottles from Al Tajir and Frigoglass in both cases from the United Arab Emirates. Coca-Cola FEMSA purchases all of its cans from Crown Colombiana, S.A., which are only available through this local supplier. Grupo Ardila Lulle, owners of Coca-Cola FEMSA’s competitor Postobón, own a minority equity interest in Peldar O-I and Crown Colombiana, S.A.
Sugar is available in Brazil at local market prices, which historically have been similar to international prices. Sugar prices in Brazil decreased approximately 4.1% as compared to 2013.See “Item 11. Quantitative and Qualitative Disclosures about Market Risk—Commodity Price Risk.” Coca-Cola FEMSA purchases glass bottles, plastic bottles and cans from several domestic and international suppliers.
In Argentina, Coca-Cola FEMSA mainly uses HFCS that it purchases from several different local suppliers as a sweetener in its products. Coca-Cola FEMSA purchases glass bottles, plastic cases and other raw materials from several domestic sources. Coca-Cola FEMSA purchases plastic preforms, as well as returnable plastic bottles, at competitive prices from Andina Empaques S.A., a local subsidiary of Embotelladora Andina S.A., a Coca-Cola bottler with operations in Chile, Argentina, Brazil and Paraguay, and other local suppliers. Coca-Cola FEMSA also acquires plastic preforms from Alpla Avellaneda, S.A. and other suppliers.
Venezuela. In Venezuela, Coca-Cola FEMSA uses sugar as a sweetener in most of its products, which it purchase mainly from the local market. Since 2003, from time to time, Coca-Cola FEMSA has experienced a sugar shortage due to lower domestic production and the inability of the predominant sugar importers to obtain permission to import in a timely manner. While sugar distribution to the food and beverages industry and to retailers is controlled by the government, Coca-Cola FEMSA did not experience any disruptions during 2014 with respect to access to sufficient sugar supply.
However, we cannot assure you that Coca-Cola FEMSA will not experience disruptions in its ability to meet its sugar requirements in the future should the Venezuelan government impose restrictive measures. Coca-Cola FEMSA buys glass bottles from one local supplier, Productos de Vidrio, S.A., the only supplier authorized by The Coca-Cola Company. Coca-Cola FEMSA acquires most of its plastic non-returnable bottles from Alpla de Venezuela, S.A. and most of its aluminum cans from a local producer, Dominguez Continental, C.A.
Under current regulations promulgated by the Venezuelan authorities, Coca-Cola FEMSA’s ability and that of its suppliers to import some of the raw materials and other supplies used in its production could be limited, and access to the official exchange rate for these items, including, among others, concentrate, resin, aluminum, plastic caps, distribution trucks and vehicles is only achieved by obtaining proper approvals from the relevant authorities.
Overview and Background
FEMSA Comercio operates the largest chain of small-format stores in Mexico, measured in terms of number of stores as of December 31, 2014, mainly under the trade name OXXO. As of December 31, 2014, FEMSA Comercio operated 12,853 OXXO stores, of which 12,812 are located throughout the country, with a particularly strong presence in the northern part of Mexico, and the remaining 41 stores are located in Bogotá, Colombia.
FEMSA Comercio was established by FEMSA in 1978 when two OXXO stores were opened in Monterrey, one store in Mexico City and another store in Guadalajara. The motivating factor behind FEMSA’s entrance into the retail industry was to enhance beer sales through company-owned retail outlets as well as to gather information on customer preferences. In 2014, a typical OXXO store carried 2,744 different store keeping units (SKUs) in 31 main product categories.
In recent years, FEMSA Comercio has represented an effective distribution channel for our beverage products, as well as a rapidly growing point of contact with our consumers. Based on the belief that location plays a major role in the long-term success of a retail operation such as a small-format store, as well as a role in our continually improving ability to accelerate and streamline the new-store development process, FEMSA Comercio has focused on a strategy of rapid, profitable growth. FEMSA Comercio opened 1,040, 1,120 and 1,132 net new OXXO stores in 2012, 2013 and 2014, respectively. The accelerated expansion in the number of OXXO stores yielded total revenue growth of 12.4% to reach Ps. 109,624 million in 2014. OXXO same-store sales increased an average of 2.7%, driven by an increased average customer ticket without any change in same-store traffic. FEMSA Comercio performed approximately 3.4 billion transactions in 2014 compared to 3.2 billion transactions in 2013.
Business Strategy
A fundamental element of FEMSA Comercio’s business strategy is to utilize its position in the small-format store market to grow in a cost-effective and profitable manner. As a market leader in small-format store retailing, based on internal company surveys, management believes that FEMSA Comercio has an in-depth understanding of its markets and significant expertise in operating a national store chain. FEMSA Comercio intends to continue increasing its store base while capitalizing on the market knowledge gained at existing stores.
FEMSA Comercio has developed proprietary models to assist in identifying appropriate store locations, store formats and product categories. Its model utilizes location-specific demographic data and FEMSA Comercio’s experience in similar locations to fine tune the store format and product offerings to the target market. Market segmentation is becoming an important strategic tool, and it should increasingly allow FEMSA Comercio to improve the operating efficiency of each location and the overall profitability of the chain.
FEMSA Comercio has made and will continue to make significant investments in IT to improve its ability to capture customer information from its existing OXXO stores and to improve its overall operating performance. The majority of products carried through OXXO stores are bar-coded, and all OXXO stores are equipped with point-of-sale systems that are integrated into a company-wide computer network. To implement revenue management strategies, FEMSA Comercio created a division in charge of product category management for products, such as beverages, fast food and perishables, to enhance and better utilize its consumer information base and market intelligence capabilities.
FEMSA Comercio utilizes a technology platform supported by an enterprise resource planning (ERP) system, as well as other technological solutions such as merchandising and point-of-sale systems, which will allow FEMSA Comercio to continue redesigning its key operating processes and enhance the usefulness of its market information going forward. In addition, FEMSA Comercio has expanded its operations by opening 3 new OXXO stores in Bogotá, Colombia in 2014.
FEMSA Comercio has adopted innovative promotional strategies in order to increase store traffic and sales. In particular, FEMSA Comercio sells high-frequency items such as beverages, snacks and cigarettes at competitive prices. FEMSA Comercio’s ability to implement this strategy profitably is partly attributable to the size of the OXXO stores chain, as FEMSA Comercio is able to work together with its suppliers to implement their revenue-management strategies through differentiated promotions. OXXO stores’ national and local marketing and promotional strategies are an effective revenue driver and a means of reaching new segments of the population while strengthening the OXXO brand. For example, the organization has refined its expertise in executing cross promotions (discounts on multi-packs or sales of complementary products at a special price) and targeted promotions to attract new customer segments, such as housewives, by expanding the offerings in the grocery product category in certain stores. FEMSA Comercio is also strengthening its capabilities to increasingly provide consumers with services such as utility bill payment and other basic transactions.
Store Locations
With 12,812 OXXO stores in Mexico and 41 OXXO stores in Colombia as of December 31, 2014, FEMSA Comercio operates the largest small-format store chain in Latin America measured by number of stores. OXXO stores are concentrated in the northern part of Mexico, but also have a growing presence in the rest of the country.
OXXO Stores
Regional Allocation in Mexico and Latin America(*)
as of December 31, 2014
FEMSA Comercio has aggressively expanded its number of OXXO stores over the past several years. The average investment required to open a new OXXO store varies, depending on location and format and whether the store is opened in an existing retail location or requires construction of a new store. FEMSA Comercio is generally able to use supplier credit to fund the initial inventory of new OXXO stores.
OXXO Stores
Total Growth
Year Ended December 31, | ||||||||||||||||||||
2014 | 2013 | 2012 | 2011 | 2010 | ||||||||||||||||
Total OXXO stores | 12,853 | 11,721 | 10,601 | 9,561 | 8,426 | |||||||||||||||
Store growth (% change over previous year) | 9.7 | % | 10.6 | % | 10.9 | % | 13.5 | % | 14.9 | % |
FEMSA Comercio currently expects to continue the OXXO stores growth trend established over the past several years by emphasizing growth in areas of high economic potential in existing markets and by expanding in underserved and unexploited markets. Management believes that the southeast part of Mexico is particularly underserved by the small-format store industry.
The identification of locations and pre-opening planning in order to optimize the results of new OXXO stores are important elements in FEMSA Comercio’s growth plan. FEMSA Comercio continuously reviews store performance against certain operating and financial benchmarks to optimize the overall performance of the chain. OXXO stores unable to maintain benchmark standards are generally closed. Between December 31, 2010 and 2014, the total number of OXXO stores increased by 4,427, which resulted from the opening of 4,573 new stores and the closing of 146 existing stores.
Competition
FEMSA Comercio, mainly through OXXO stores, competes in the overall retail market, which we believe is highly competitive. OXXO stores face competition from small-format stores like 7-Eleven, Super Extra, Super City, Círculo K stores and other numerous chains of retailers across Mexico, from other regional small-format retailers to small informal neighborhood stores. OXXO competes both for consumers and for new locations for stores and the managers to operate those stores. FEMSA Comercio operates in the 32 Mexican states and has much broader geographical coverage than any of its competitors in Mexico.
Market and Store Characteristics
Market Characteristics
FEMSA Comercio is placing increased emphasis on market segmentation and differentiation of store formats to more appropriately serve the needs of customers on a location-by-location basis. The principal segments include residential neighborhoods, commercial and office locations and stores near schools and universities, along with other types of specialized locations.
Approximately 64.3% of OXXO stores’ customers are between the ages of 15 and 35. FEMSA Comercio also segments the market according to demographic criteria, including income level.
OXXO Store Characteristics
The average size of an OXXO store is approximately 104 square meters of selling space, excluding space dedicated to refrigeration, storage or parking. The average constructed area of a store is approximately 187 square meters and, when parking areas are included, the average store size is approximately 421 square meters.
FEMSA Comercio—Operating Indicators
Year Ended December 31, | ||||||||||||||||||||
2014 | 2013 | 2012 | 2011 | 2010 | ||||||||||||||||
(percentage increase compared to previous year) | ||||||||||||||||||||
Total FEMSA Comercio revenues | 12.4 | % | 12.9 | % | 16.6 | % | 19.0 | % | 16.3 | % | ||||||||||
OXXO same-store sales(1) | 2.7 | % | 2.4 | % | 7.7 | % | 9.2 | % | 5.2 | % |
(1) | Same-store sales growth is calculated by comparing the sales of stores for each year that have been in operation for more than 12 months with the sales of those same stores during the previous year. |
Beer, cigarettes, soft drinks and other beverages and snacks represent the main product categories for OXXO stores. FEMSA Comercio has a distribution agreement with Cuauhtémoc Moctezuma (which is now part of the Heineken Group). As a result of this agreement, OXXO stores only carry beer brands produced and distributed by Cuauhtémoc Moctezuma. OXXO stores will continue to benefit from the existing relationship under which Cuauhtémoc Moctezuma will continue to be the exclusive supplier of beer to OXXO until June 2020.
Approximately 59% of OXXO stores are operated by independent managers responsible for all aspects of store operations. The managers are commission agents and are not employees of FEMSA Comercio. Each store manager is the legal employer of the store’s staff, which typically numbers six people per store. FEMSA Comercio continually invests in on-site operating personnel, with the objective of promoting loyalty, customer service and low personnel turnover in the stores.
Advertising and Promotion
FEMSA Comercio’s marketing efforts for OXXO stores include both specific product promotions and image advertising campaigns. These strategies seek to increase store traffic and sales, and to reinforce the OXXO name and market position.
FEMSA Comercio manages its advertising for OXXO stores on three levels depending on the nature and scope of the specific campaign: local or store-specific, regional and national. Store-specific and regional campaigns are closely monitored to ensure consistency with the overall corporate image of OXXO stores and to avoid conflicts with national campaigns. FEMSA Comercio primarily uses point of purchase materials, flyers, handbills and print and radio media for promotional campaigns, although television is used occasionally for the introduction of new products and services. The OXXO store chain’s image and brand name are presented consistently across all stores, irrespective of location.
Inventory and Purchasing
FEMSA Comercio has placed considerable emphasis on improving operating performance. As part of these efforts, FEMSA Comercio continues to invest in extensive information management systems to improve inventory management. Electronic data collection has enabled FEMSA Comercio to reduce average inventory levels. Inventory replenishment decisions are carried out on a store-by-store basis.
Management believes that the OXXO store chain’s scale of operations provides FEMSA Comercio with a competitive advantage in its ability to realize strategic alliances with suppliers. General category offerings are determined on a national level, although purchasing decisions are implemented on a local, regional or national level, depending on the nature of the product category. Given the fragmented nature of the retail industry in Mexico in general, Mexican producers of beer, soft drinks, bread, dairy products, snacks, cigarettes and other high-frequency products have established proprietary distribution systems with extensive direct distribution routes. As a result, approximately 53% of the OXXO store chain’s total sales consist of products that are delivered directly to the stores by suppliers. Other products with longer shelf lives are distributed to stores by FEMSA Comercio’s distribution system, which includes 16 regional warehouses located in Monterrey, Guadalajara, Mexicali, Mérida, León, Obregón, Puebla, Queretaro, Chihuahua, Reynosa, Saltillo, Tijuana, Toluca, Villahermosa and two in Mexico City. The distribution centers operate a fleet of approximately 792 trucks that make deliveries to each store approximately twice per week.
Seasonality
OXXO stores experience periods of high demand in December, as a result of the holidays, and in July and August, as a result of increased consumption of beer and soft drinks during the hot summer months. The months of November and February are generally the weakest sales months for OXXO stores. In general, colder weather during these months reduces store traffic and consumption of cold beverages.
Entry into Drugstore Market
During 2013, FEMSA Comercio entered the drugstore market in Mexico through two transactions. FEMSA Comercio through CCF, closed the acquisition of Farmacias YZA, a leading drugstore operator in Southeast Mexico, headquartered in Merida, Yucatan. The founding shareholders of Farmacias YZA hold a 25% stake in CCF. Following this transaction, on May 13, 2013, CCF acquired Farmacias Moderna, a leading drugstore operator in the western state of Sinaloa.
In December 2014, FEMSA Comercio through CCF agreed to acquire 100% of Farmacias Farmacón, a a regional pharmacy chain consisting of 213 stores in the northwestern Mexican states of Sinaloa, Sonora, Baja California and Baja California Sur. With this transaction, FEMSA Comercio will reach a total of approximately 803 pharmacy stores. The transaction is pending customary regulatory approvals, and is expected to close during the second quarter of 2015.
The rationale for entering this new market is anchored on our belief that FEMSA Comercio has developed certain capabilities and skills that should be applicable and useful in the operation of other small retail formats. These capabilities include site selection, logistics, business processes, human resources, inventory and supplier management. The drugstore market in Mexico is very fragmented and FEMSA Comercio believes it is well equipped to create value by entering this market and pursuing a growth strategy that maximizes the opportunity.
Entry into Quick Service Restaurant Market
Following the same rationale that its capabilities and skills are well suited to different types of small-format retail, during 2013 FEMSA Comercio also entered the quick service restaurant market in Mexico through the 80% acquisition of Doña Tota. This is a leading regional chain specializing in Mexican food with a particularly strong presence in the northeast of the country. This acquisition presented FEMSA Comercio with the opportunity to grow Doña Tota’s stand-alone store base across the country, while also offering the benefit of advancing FEMSA Comercio’s prepared food capabilities and expertise.
Gas Station Market
Since 1995, FEMSA Comercio has been providing services and assets for the operation of gasoline service stations through agreements with third parties that own Petroleos Mexicanos (PEMEX) franchises, using the commercial brand OXXO Gas. As of December 31, 2014 there were 227 OXXO Gas stations, most of them adjacent to OXXO stores.
Mexican legislation has historically precluded FEMSA Comercio from participating in the retail sale of gasoline and therefore precluded ownership of PEMEX franchises, given our foreign institutional investor base. In response to recent changes in this legislation, FEMSA Comercio has agreed to acquire the related PEMEX franchises from the aforementioned third parties and plans to lease, acquire or open more gasoline service stations in the future.
Other Stores
FEMSA Comercio also operates other small-format stores, which include soft discount stores with a focus on perishables and liquor stores.
Equity Investment in the Heineken Group
As of December 31, 2014, FEMSA owned a non-controlling interest in the Heineken Group, FEMSA’s non-controlling shareholder position in Heineken N.V. and Heineken Holding N.V. means that it will be unable to require paymentone of dividends with respect to the Heineken N.V. or Heineken Holding N.V. shares.
Risks Related to Mexico and the Other Countries in Which We Operate
Adverse economic conditions in Mexico may adversely affectworld’s leading brewers. As of December 31, 2014, our financial position and results from operations.
We are a Mexican corporation, and our Mexican operations are our single most important geographic territory. Given the exchange of 100% of our FEMSA Cerveza business for a 20% economic interest in the Heineken Group was comprised of 43,018,320 shares of Heineken Holding N.V. and 72,182,203 shares of Heineken N.V. For 2014, FEMSA shareholders may facerecognized equity income of Ps. 5,244 million regarding its 20% economic interest in the Heineken Group; see Note 10 to our audited consolidated financial statements.
As described above, FEMSA Comercio has a lesser degreedistribution agreement with Cuauhtémoc Moctezuma (which is now a part of exposurethe Heineken Group) pursuant to which OXXO stores only carry beer brands produced and distributed by Cuauhtémoc Moctezuma. OXXO stores will continue to benefit from the existing relationship under which Cuauhtémoc Moctezuma will continue to be the exclusive supplier of beer to OXXO until June 2020. As of April 30, 2010, Coca-Cola FEMSA has agreed with respectCervejarias Kaiser (also now part of the Heineken Group) to economic conditionscontinue to distribute and sell the Kaiser beer portfolio in Coca-Cola FEMSA’s Brazilian territories for a 20-year term beginning in 2003, consistent with the arrangement already in place. In addition, our logistic services subsidiary provides certain services to Cuauhtémoc Moctezuma and its subsidiaries.
Our other business consists of the following smaller operations that support our core operations:
Our logistics services subsidiary provides a broad range of logistics and vehicle maintenance services to Coca-Cola FEMSA, FEMSA Comercio and third-party clients in the beverages, consumer products and retail industries. It has operations in Mexico, Brazil, Colombia, Panama, Costa Rica, Nicaragua and Perú.
Our refrigeration business produces vertical and horizontal commercial refrigerators for the soft drink, beer and food industries, with an annual capacity of 535,800 units at December 31, 2014. In 2014, this business sold 418,064 refrigeration units, 30% of which were sold to Coca-Cola FEMSA, and the remainder of which were sold to third parties.
Our corporate services subsidiary employs our corporate staff, including the personnel managing the areas of finance, corporate accounting, taxation, legal, financial and strategic planning, human resources, corporate affairs and internal audit. Through this subsidiary, we direct, control, supervise and review the operations of our sub-holding companies. As of December 31, 2014, FEMSA Comercio and our other business subsidiaries pay management fees for the services provided to them. In addition, Coca-Cola FEMSA has entered into a greater degreeservices agreement pursuant to which it pays for specific services.
Description of indirect exposureProperty, Plant and Equipment
As of December 31, 2014, we owned all of our manufacturing facilities and substantially all of our warehouses and distribution centers. Our properties primarily consisted of production and distribution facilities for our soft drink operations and office space. In addition, FEMSA Comercio owns approximately 11.2% of the OXXO store locations, while the other stores are located in properties that are rented under long-term lease arrangements with third parties.
The table below summarizes by country the installed capacity and percentage utilization of Coca-Cola FEMSA’s production facilities:
Bottling Facility Summary
As of December 31, 2014
Country | Installed Capacity (thousands of unit cases) | Utilization(1) (%) | ||||||
Mexico | 2,939,936 | 58 | % | |||||
Guatemala | 45,500 | 69 | % | |||||
Nicaragua | 67,700 | 68 | % | |||||
Costa Rica | 81,200 | 56 | % | |||||
Panama | 56,700 | 57 | % | |||||
Colombia | 532,616 | 56 | % | |||||
Venezuela | 275,542 | 86 | % | |||||
Brazil | 1,044,932 | 67 | % | |||||
Argentina | 340,397 | 65 | % |
(1) | Annualized rate. |
The table below summarizes by country the location and facility area of each of Coca-Cola FEMSA’s production facilities.
Bottling Facility by Location
As of December 31, 2014
Country | Plant | Facility Area | ||||
(thousands of sq. meters) | ||||||
Mexico | San Cristóbal de las Casas, Chiapas | 45 | ||||
Cuautitlán, Estado de México | 35 | |||||
Los Reyes la Paz, Estado de México | 50 | |||||
Toluca, Estado de México | 317 | |||||
León, Guanajuato | 124 | |||||
Morelia, Michoacán | 50 | |||||
Ixtacomitán, Tabasco | 117 | |||||
Apizaco, Tlaxcala | 80 | |||||
Coatepec, Veracruz | 142 | |||||
La Pureza Altamira, Tamaulipas | 300 | |||||
Poza Rica, Veracruz | 42 | |||||
Pacífico, Estado de México | 89 | |||||
Cuernavaca, Morelos | 37 | |||||
Toluca, Estado de México (Ojuelos) | 41 | |||||
San Juan del Río, Querétaro | 84 | |||||
Querétaro, Querétaro | 80 | |||||
Cayaco, Acapulco | 104 | |||||
Guatemala | Guatemala City | 46 | ||||
Nicaragua | Managua | 54 | ||||
Costa Rica | Calle Blancos, San José | 52 | ||||
Coronado, San José | 14 | |||||
Panama | Panama City | 29 | ||||
Colombia | Barranquilla | 37 | ||||
Bogotá, DC | 105 | |||||
Bucaramanga | 26 | |||||
Cali | 76 | |||||
Manantial, Cundinamarca | 67 | |||||
Tocancipá | 298 | |||||
Medellín | 47 |
Country | Plant | Facility Area | ||||
(thousands of sq. meters) | ||||||
Venezuela | Antímano | 15 | ||||
Barcelona | 141 | |||||
Maracaibo | 68 | |||||
Valencia | 100 | |||||
Brazil | Campo Grande | 36 | ||||
Jundiaí | 191 | |||||
Mogi das Cruzes | 119 | |||||
Belo Horizonte | 73 | |||||
Porto Real | 108 | |||||
Maringá | 160 | |||||
Marilia | 159 | |||||
Curitiba | 119 | |||||
Baurú | 39 | |||||
Itabirito | 320 | |||||
Argentina | Alcorta, Buenos Aires | 73 | ||||
Monte Grande, Buenos Aires | 32 |
We maintain an “all risk” insurance policy covering our properties (owned and leased), machinery and equipment and inventories as well as losses due to business interruptions. The policy covers damages caused by natural disaster, including hurricane, hail, earthquake and damages caused by human acts, including explosion, fire, vandalism and riot. We also maintain a freight transport insurance policy that covers damages to goods in transit. In addition, we maintain a liability insurance policy that covers product liability. We purchase our insurance coverage through an insurance broker. In 2014, the political, economicpolicies for “all risk” property insurance, freight transport insurance and social circumstances affectingliability insurance were issued by ACE Seguros, S.A. Our “all risk” coverage was partially reinsured in the markets in which Heinekeninternational reinsurance market. We believe that our coverage is present. Forconsistent with the yearcoverage maintained by similar companies.
Capital Expenditures and Divestitures
Our consolidated capital expenditures, net of disposals, for the years ended December 31, 2011, 60%2014, 2013 and 2012 were Ps. 18,163 million, Ps. 17,882 million and Ps. 15,560 million respectively, and were for the most part financed from cash from operations generated by our subsidiaries. These amounts were invested in the following manner:
Year Ended December 31, | ||||||||||||
2014 | 2013 | 2012 | ||||||||||
(In millions of Mexican pesos) | ||||||||||||
Coca-Cola FEMSA | Ps. 11,313 | Ps. 11,703 | Ps. 10,259 | |||||||||
FEMSA Comercio | 5,191 | 5,683 | 4,707 | |||||||||
Other | 1,659 | 496 | 594 | |||||||||
|
|
|
|
|
| |||||||
Total | Ps. 18,163 | Ps. 17,882 | Ps. 15,560 |
Coca-Cola FEMSA
In 2014, Coca-Cola FEMSA focused its capital expenditures on investments in (1) increasing production capacity, (2) placing coolers with retailers, (3) returnable bottles and cases, (4) improving the efficiency of our consolidated total revenues were attributableits distribution infrastructure and (5) information technology. Through these measures, Coca-Cola FEMSA strives to Mexicoimprove its profit margins and at the net income level the percentage attributable to our Mexicanoverall profitability.
operationsFEMSA Comercio
FEMSA Comercio’s principal investment activity is further reduced.the construction and opening of new stores. During 2014, FEMSA Comercio opened 1,132 net new OXXO stores. FEMSA Comercio invested Ps. 5,191 million in 2014 in the addition of new stores, warehouses and improvements to leased properties.
Antitrust Legislation
TheLey Federal de Competencia Económica (Federal Antitrust Law) became effective on June 22, 1993, regulating monopolistic practices and requiring Mexican government approval of certain mergers and acquisitions. The Federal Antitrust Law subjects the activities of certain Mexican economy experiencedcompanies, including us, to regulatory scrutiny.
In June 2013, following a downturn ascomprehensive reform to the Mexican Constitution, a new antitrust authority with autonomy was created: the Federal Antitrust Commission (Comisión Federal de Competencia Económica, or the CFCE). As a result of these amendments, new antitrust and telecommunications specialized courts were created and commenced hearing cases in August 2013. In July 2014, a new Federal Antitrust Law came into effect based on the impactamended constitutional provisions.
These amendments granted more power to the CFCE, including the ability to regulate essential facilities, order the divestment of assets and eliminate barriers to competition, set higher fines for violations of the global financial crisis on many emerging economies that began inFederal Antitrust Law, implement important changes to rules governing mergers and anti-competitive behavior and limit the second halfavailability of 2008 and continued through 2010. Inlegal defenses against the fourth quarter of 2011, Mexican gross domestic product, or GDP, increased by approximately 3.7% on an annualized basis compared to the same period in 2010, due to an improvement in the manufacturing and services sectorsapplication of the economy. Thelaw. Management believes that we are currently in compliance in all material respects with Mexican economy continues to be heavily influenced by the U.S. economy,antitrust legislation.
In Mexico and therefore, further deterioration in economic conditions in, or delays in recoverysome of the U.S. economy may hinder any recoveryother countries in Mexico. Inwhich we operate, we are involved in different ongoing competition related proceedings. We believe that the past, Mexico has experienced both prolonged periodsoutcome of weak economic conditions and deteriorations in economic conditions that have had a negative impact on our results from operations. Given the continuing global macroeconomic downturn in 2009 and 2010, and the slow and uncertain recovery in 2011, which also affected the Mexican economy, we cannot assure you that such conditionsthese proceedings will not have a material adverse effect on our results from operations and financial position going forward.
Our business may be significantly affected by the general condition of the Mexican economy, or by the rate of inflation in Mexico, interest rates in Mexico and exchange rates for, or exchange controls affecting, the Mexican peso. Decreases in the growth rate of the Mexican economy, periods of negative growth and/or increases in inflation or interest rates may result in lower demand for our products, lower real pricing of our products or a shift to lower margin products. Because a large percentage of our costs and expenses are fixed, we may not be able to reduce costs and expenses upon the occurrence of any of these events, and our profit margins may suffer as a result.
In addition, an increase in interest rates in Mexico would increase the cost to us of variable rate debt, which constituted 41% of our total debt as of December 31, 2011 (including the effect of interest rate swaps), and have an adverse effect on our financial position and results from operations.
results.Depreciation of the Mexican peso relative to the U.S. dollar could adversely affect our financial position and results from operations.
Depreciation of the Mexican peso relative to the U.S. dollar increases the cost to us of a portion of the raw materials we acquire, the price of which is paid in or determined with reference to U.S. dollars, and of our debt obligations denominated in U.S. dollars and thereby negatively affects our financial position and results from operations. A severe devaluation or depreciation of the Mexican peso may result in disruption of the international foreign exchange markets and may limit our ability to transfer or to convert Mexican pesos into U.S. dollars and other currencies for the purpose of making timely payments of interest and principal on our U.S. dollar-denominated debt or obligations in other currencies. Although the value of the Mexican peso against the U.S. dollar had been fairly stable until mid-2008, in the fourth quarter of 2008, the Mexican peso depreciated approximately 27% compared to the fourth quarter of 2007. Since 2008, the Mexican peso has continued to experience exchange rate fluctuations relative to the U.S. dollar, as follows. During 2009 and 2010, the Mexican peso experienced a recovery relative to the U.S. dollar of approximately 5.2% and 5.6% compared to the year of 2008 and 2009, respectively. During 2011, the Mexican peso experienced a devaluation relative to the U.S. dollar of approximately 12.7% compared to 2010. In the first quarter of 2012, the Mexican peso appreciated approximately 8.2% relative to the U.S. dollar compared to the fourth quarter of 2011.
While the Mexican government does not currently restrict, and since 1982 has not restricted, the right or ability of Mexican or foreign persons or entities to convert Mexican pesos into U.S. dollars or to transfer other currencies out of Mexico, the Mexican government could institute restrictive exchange rate policies in the future, as it has done in the past. Currency fluctuations may have an adverse effect on our financial position, results from operations and cash flows in future periods.
When the financial markets are volatile, as they have been in recent periods, our results from operations may be substantially affected by variations in exchange rates and commodity prices, and to a lesser degree, interest rates. These effects include foreign exchange gain and loss on assets and liabilities denominated in U.S. dollars, fair value gain and loss on derivative financial instruments, commodities prices and changes in interest income and interest expense. These effects can be much more volatile than our operating performance and our operating cash flows.
Political events in Mexico could adversely affect our operations.See “Item 8. Financial Information—Legal Proceedings—Coca-Cola FEMSA.”
Mexican political events may significantly affect our operations. Presidential electionsPrice Controls
Voluntary price restraints or statutory price controls have been imposed historically in Mexico occur every six years,several of the countries in which Coca-Cola FEMSA operates. Currently, there are no price controls on Coca-Cola FEMSA’s products in any of the territories in which it has operations, except for those in Argentina, where authorities directly supervise five products sold through supermarkets as a measure to control inflation, and Venezuela, where the government has imposed price controls on certain products, including bottled water. In addition, in January 2014, the Venezuelan government passed the Fair Prices Law (Ley Orgánica de Precios Justos), which was amended in November 2014 mainly to increase applicable fines and penalties. This law substitutes both the Access to Goods and Services Defense Law (Ley para la Defensa y Acceso a las Personas a los Bienes y Servicios) and the most recent election occurred in July 2006. Elections of the senate also occurred in July 2006,Fair Costs and although thePartido Acción NacionalPrices Law (or the PAN) won a plurality of the seats in the Mexican congress in the election, no party succeeded in securing a majority. Elections of theCámara de Diputados(House of Representatives) occurred in 2009, and although thePartido Revolucionario Institucional(or, was elected as the PRI) wonpresident of Mexico and took office on December 1, 2012. In addition, the Mexican Congress has recently approved a pluralitynumber of seatsstructural reforms intended to modernize certain sectors of and foster growth in the HouseMexican economy, and is continuing to approve further reforms. Now two years into his term, President Peña Nieto will face significant challenges as the structural reforms approved by the Mexican Congress begin having an effect on the Mexican economy and population. Furthermore, no single party has a majority in the Senate or theCámara de Diputados (House of Representatives, no party succeeded in securing a majority. The legislative gridlock resulting fromRepresentatives), and the absence of a clear majority by anya single party which is expected to continue until the Mexican presidentialcould result in government gridlock and federal congressional elections to be held in July 2012, has impeded the progress of structural reformspolitical uncertainty. We cannot provide any assurances that political developments in Mexico, which may adversely affect economic conditions in Mexico, and consequently, our results of operations.
The Mexican presidential election in July 2012 will result in a change in administration, as Mexican law does not allow a sitting president to run for a second consecutive term. The presidential race is expected to be highly contested among a number of different parties, including the PRI, the PAN and thePartido de la Revolución Democrática (the Party of the Democratic Revolution, or PRD), each with its own political platform. As a result, we cannot predict which party will win the presidential election or whether changes in Mexican governmental policy will result from a change in administration. Such changes, should they occur, may adversely affect economic conditions and/or the industries inover which we operate in Mexico,have no control, will not have an adverse effect on our business, financial condition, results and therefore our results of operations and financial position.prospects.
InsecuritySecurity risks in Mexico could increase, and this could adversely affect our results.
The presence and increasing levels of violence among drug cartels, and between these and the Mexican law enforcement and armed forces, pose a risk to our business. Organized criminal activity and related violent incidents remained high during 2011have decreased relative to 2012 and the first quarter2013, but remain prevalent in some parts of 2012 andMexico. These incidents are relatively concentrated along the northern Mexican border, as well as in certain other Mexican states such as Sinaloa, Michoacán and Guerrero. Mexican President Felipe Calderón has actedThe north of Mexico is an important region for our retail operations, and an increase in crime rates could negatively affect our sales and customer traffic, increase our security expenses, and result in higher turnover of personnel or damage to fight the drug cartels and has disrupted the balanceperception of power among them. The principal driver of organized criminal activity is the drug trade that aims to supply and profit from the uninterrupted demand for drugs and the supply of weapons from the United States.our brands. This situation could worsen and adversely impact our business and financial results because consumer habits and patterns adjust to the increased perceived and real insecuritysecurity risks, as people refrain from going out as much and gradually shift some on-premise consumption to off-premise consumption of food and beverages on certain social occasions. Insecurity could increase, and this could therefore adversely affect our operational and financial results.
Depreciation of local currencies in other Latin American countries in which we operate may adversely affect our financial position.
Total revenues increased in certain of our non-Mexican beverage operations at a higher rate relative to their respective Mexican operations in 2010. Although this was not the case in 2011, the recurrence of such a higher rate of total revenue growth could result in a greater contribution to the respective results from operations for these territories, but may also expose us to greater risk in these territories as a result. The devaluation of the local currencies against the U.S. dollar in our non-Mexican territories can increase our operating costs in these countries, and depreciation of the local currencies against the Mexican peso can negatively affect our results from operations for these countries. In recent years, the value of the currency in the countries in which we operate hadhas been relatively stable relative to the Mexican peso, except in Venezuela. During 2014, in addition to Venezuela, the currencies of Brazil and Argentina also depreciated against the Mexican peso. Future currency devaluation or the imposition of exchange controls in any of these countries, includingor in Mexico, would have an adverse effect on our financial position and results.
We have operated under exchange controls in Venezuela since 2003, which limits our ability to remit dividends abroad or make payments other than in local currency and that may increase the real price paid for raw materials and services purchased in local currency. We have historically used the official exchange rate (currently 6.30 bolivars to US$ 1.00) in our Venezuelan operations. Nonetheless, since the beginning of 2014, the Venezuelan government announced a series of changes to the Venezuelan exchange control regime.
In January 2014, the Venezuelan government announced an exchange rate determined by the state-run system known as theSistema Complementario de Administración de Divisas, or SICAD. In March 2014, the Venezuelan government announced a new law that authorized an alternative method of exchanging Venezuelan bolivars to U.S. dollars known as SICAD II. In February 2015, the Venezuelan government announced that it was replacing SICAD II with a new market-based exchange rate determined by the system known as the Sistema Marginal de Divisas, or SIMADI. The SICAD determines the exchange rates based on limited periodic sales of U.S. dollars through auctions in which only entities authorized by the Venezuelan government may participate, while SIMADI determines the exchange rates based on supply and demand of U.S. dollars, in which participation does not require authorization by the Venezuelan government. The SICAD and SIMADI exchange rates in effect as of April 17, 2015, were 12.00 and 196.66 bolivars per US$ 1.00, respectively.
We translated our results from operations.of operations in Venezuela for the full year ended December 31, 2014 into our reporting currency, the Mexican peso, using the SICAD II exchange rate of 49.99 bolivars to US$ 1.00, which was the exchange rate in effect as of such date. As a result, we recognized a reduction in equity of Ps. 11,836 million as of December 31, 2014 and as of such date, our foreign direct investment in Venezuela was Ps. 4,015 million. This reduction adversely affected our comprehensive income for the year ended December 31, 2014. In addition, the translation of our Venezuelan results adversely affected our financial results of operation in the amount of Ps. 1,895 million for the year ended December 31, 2014.
Based upon our specific facts and circumstances, we anticipate using the SIMADI exchange rate to translate our future results of operations in Venezuela into our reporting currency, the Mexican peso, commencing with our results for the first quarter of 2015. This translation effect will further adversely affect our comprehensive income and financial position. The Venezuelan government may announce further changes to the exchange rate system in the future. To the extent a higher exchange rate is applied to our investment in Venezuela in future periods as a result of changes to existing regulations, subsequently adopted regulations or otherwise, we could be required to further reduce the amount of our foreign direct investment in Venezuela and our comprehensive income in Venezuela and financial condition could be further adversely affected. More generally, future currency devaluations or the imposition of exchange controls in any of the countries in which we operate may potentially increase our operating costs, which could have an adverse effect on our financial position and comprehensive income.
ITEM 4. | INFORMATION ON THE COMPANY |
We are a Mexican company headquartered in Monterrey, Mexico, and our origin dates back to 1890. Our company was incorporated on May 30, 1936 and has a duration of 99 years. The duration can be extended indefinitely by resolution of our shareholders. Our legal name is Fomento Económico Mexicano, S.A.B. de C.V., and in commercial contexts we frequently refer to ourselves as FEMSA. Our principal executive offices are located at General Anaya No. 601 Pte., Colonia Bella Vista, Monterrey, Nuevo León 64410, Mexico. Our telephone number at this location is (52-81) 8328-6000. Our website is www.femsa.com. We are organized as asociedad anónima bursátil de capital variable under the laws of Mexico.
We conduct our operations through the following principal holding companies, each of which we refer to as a principal sub-holding company:
Coca-Cola FEMSA, which engages in the production, distribution and marketing of soft drinks;beverages;
FEMSA Comercio, which operates conveniencesmall-format stores; and
CB Equity, which holds our investment in Heineken.
On April 30, 2010, FEMSA announced the closing of the transaction pursuant to which FEMSA agreed to exchange 100% of its beer operations for a 20% economic interest in the Heineken Group. Under Mexican FRS, we have reclassified our consolidated statements of income and cash flows for the year ended December 31, 2009 to reflect FEMSA Cerveza as a discontinued operation. However, FEMSA Cerveza is not a discontinued operation under U.S. GAAP. See “Item 5. Operating and Financial Review and Prospects—U.S. GAAP Reconciliation” and Notes 26 and 27 to our audited consolidated financial statements.
FEMSA traces its origins to the establishment of Mexico’s first brewery, Cervecería Cuauhtémoc, S.A., which we refer to as Cuauhtémoc, which was founded in 1890 by four Monterrey businessmen: Francisco G. Sada, José A. Muguerza, Isaac Garza and José M. Schneider. Descendants of certain of the founders of Cuauhtémoc are participants of the voting trust that controls the management of our company.
The strategic integration of our company dates back to 1936 when our packaging operations were established to supply crown caps to the brewery. During this period, these operations were part of what was known as the Monterrey Group, which also included interests in banking, steel and other packaging operations.
In 1974, the Monterrey Group was split between two branches of the descendants of the founding families of Cuauhtémoc. The steel and other packaging operations formed the basis for the creation of Corporación Siderúrgica, S.A. (now Alfa, S.A.B. de C.V.), controlled by the Garza Sada family, and the beverage and banking operations were consolidated under the Valores Industriales, S.A. de C.V. (the corporate predecessor of FEMSA) corporate umbrella controlled by the Garza Lagüera family. FEMSA’s shares were first listed on what is now the Bolsa Mexicana de Valores, S.A.B. de C.V. (which we refer to as the Mexican Stock Exchange) on September 19, 1978. Between 1977 and 1981, FEMSA diversified its operations through acquisitions in the soft drinks and mineral water industries, the establishment of the first convenience stores under the trade name OXXO and other investments in the hotel, construction, auto parts, food and fishing industries, which were considered non-core businesses and were subsequently divested.
In August 1982, the Mexican government suspended payment on its international debt obligations and nationalized the Mexican banking system. In 1985, certain controlling shareholders of FEMSA acquired a
controlling interest in Cervecería Moctezuma, S.A., which was then Mexico’s third-largest brewery and which we refer to as Moctezuma, and related companies in the packaging industry. FEMSA subsequently undertook an extensive corporate and financial restructuring that was completed in December 1988, and pursuant to which FEMSA’s assets were combined under a single corporate entity, which became Grupo Industrial Emprex, S.A. de C.V., which we refer to as Emprex.
In October 1991, certain majority shareholders of FEMSA acquired a controlling interest in Bancomer, S.A., which we refer to as Bancomer. The investment in Bancomer was undertaken as part of the Mexican government’s reprivatization of the banking system, which had been nationalized in 1982. The Bancomer acquisition was financed in part by a subscription by Emprex’s shareholders, including FEMSA, of shares in Grupo Financiero Bancomer, S.A. de C.V. (currently Grupo Financiero BBVA Bancomer, S.A. de C.V.), which we refer to as BBVA Bancomer, the Mexican financial services holding company that was formed to hold a controlling interest in Bancomer. In February 1992, FEMSA offered Emprex’s shareholders the opportunity to exchange the BBVA Bancomer shares to which they were entitled for Emprex shares owned by FEMSA. In August 1996, the shares of BBVA Bancomer that were received by FEMSA in the exchange with Emprex’s shareholders were distributed as a dividend to FEMSA’s shareholders.
Upon the completion of these transactions,1990s, we began a series of strategic transactions to strengthen the competitive positions of our operating subsidiaries. These transactions included the sale of a 30% strategic interest in Coca-Cola FEMSA to a wholly-owned subsidiary of The Coca-Cola Company and a subsequent public offering of Coca-Cola FEMSA shares, both of which occurred in 1993,1993. Coca-Cola FEMSA listed its L shares on the Mexican Stock Exchange and, in the saleform of a 22% strategic interest in FEMSA Cerveza to Labatt Brewing Company Limited, which we refer to as Labatt, in 1994. Labatt, which was later acquired by InBev S.A., or InBev (known atADS, on the time of the acquisition of Labatt as Interbrew and currently referred to as A-B InBev), subsequently increased its interest in FEMSA Cerveza to 30%.New York Stock Exchange.
In 1998, we completed a reorganization that:
that changed our capital structure by converting our outstanding capital stock at the time of the reorganization into BD Units and B Units, and
united the shareholders of FEMSA and the former shareholders of Grupo Industrial Emprex, S.A. de C.V. (which we refer to as Emprex) at the same corporate level through an exchange offer that was consummated on May 11, 1998.
As part of the reorganization, FEMSA listed ADSs on the NYSE representing BD Units, and listed the BD Units and its B Units on the Mexican Stock Exchange.
In May 2003, our subsidiary Coca-Cola FEMSA expanded its operations throughout Latin America by acquiring 100% of Panamerican Beverages, Inc., which we refer to as Panamco, then the largest soft drink bottler in Latin America in terms of sales volume in 2002. Through its acquisition of Panamco, Coca-Cola FEMSA began producing and distributingCoca-Cola trademark beverages in additional territories in Mexico, Central America, Colombia, Venezuela and Brazil, along with bottled water, beer and other beverages in some of these territories. The Coca-Cola Company and its subsidiaries received Series D Shares in exchange for their equity interest in Panamco of approximately 25%.
In August 2004, we consummated a series of transactions with InBev, Labatt and certain of their affiliates to terminate the existing arrangements between FEMSA Cerveza and Labatt. As a result of these transactions, FEMSA acquired 100% ownership of FEMSA Cerveza and previously existing arrangements among affiliates of FEMSA and InBev relating to governance, transfer of ownership and other matters with respect to FEMSA Cerveza were terminated.
In June 2005, we consummated an equity offering of 80.5 million BD Units (including BD Units in the form of ADSs) and 52.78 million B units that resulted in net proceeds to us of US$ 700 million after underwriting spreads and commissions. We used the proceeds of the equity offering to refinance indebtedness incurred in connection with the transactions with InBev, Labatt and certain of their affiliates.
In January 2006, FEMSA Cerveza, through one of its subsidiaries, acquired 68% of the equity of the Brazilian brewer Cervejarias Kaiser, which we refer to as Kaiser, from the Molson Coors Brewing Company, or Molson Coors, for US$ 68 million. Molson Coors retained a 15% ownership stake in Kaiser, while Heineken N.V.’s ownership of 17% remained unchanged. In December 2006, Molson Coors completed its exit from Kaiser by exercising its option to sell its 15% holding to FEMSA Cerveza. On December 22, 2006, FEMSA Cerveza made a capital increase of US$ 200 million in Kaiser. At the time, Heineken N.V. elected not to participate in the increase, thereby diluting its 17% interest in Kaiser to 0.17%, and FEMSA Cerveza thereby increased its stake to 99.83% of the equity of Kaiser. However, in August 2007, FEMSA Cerveza and Heineken N.V. closed a stock purchase agreement whereby Heineken N.V. purchased the shares necessary to regain its 17% interest in Kaiser. As a result of this transaction, FEMSA Cerveza obtained ownership of 83% of Kaiser and Heineken N.V. obtained ownership of 17%.
In November 2006, we acquired from certain subsidiaries of The Coca-Cola Company 148,000,000 Series D shares of Coca-Cola FEMSA, representing 8.02% of the total outstanding stock of Coca-Cola FEMSA. We acquired these shares at a price of US$ 427.4 million in the aggregate, pursuant to a Memorandum of Understanding with The Coca-Cola Company. As of April 20, 2012, we indirectly owned Series A Shares of Coca-Cola FEMSA equal to 50.0% of its capital stock (63.0% of its capital stock with full voting rights) and The Coca-Cola Company indirectly owned Series D Shares of Coca-Cola FEMSA equal to 29.4% of its capital stock (37.0% of its capital stock with full voting rights). The remaining 20.6% of Coca-Cola FEMSA’s capital stock consisted of Series L Shares with limited voting rights, which trade on the Mexican Stock Exchange and/or on the NYSE in the form of ADSs under the trading symbol KOF.
In March 2007, at our company’s AGM, our shareholders approved a three-for-one stock split of FEMSA’s outstanding stock and our ADSs traded on the NYSE. The pro rata stock split had no effect on the ownership structure of FEMSA. The new units issued in the stock split were distributed by the Mexican Stock Exchange on May 28, 2007, to holders of record as of May 25, 2007, and ADSs traded on the NYSE were distributed on May 30, 2007, to holders of record as of May 25, 2007.
In November 2007, Administración, S.A.P.I. de C.V., or Administración, a Mexican company owned directly or indirectly by Coca-Cola FEMSA and by The Coca-Cola Company, acquired 58,350,908 shares representing 100% of the shares of the capital stock of Jugos del Valle, for US$ 370 million in cash, with assumed liabilities of US$ 86 million. On June 30, 2008, Administración and Jugos del Valle merged, and Jugos del Valle became the surviving entity. Subsequent to the initial acquisition of Jugos del Valle, Coca-Cola FEMSA offered to sell 30% of its interest in Administración to other Coca-Cola bottlers in Mexico. In December 2008, the surviving Jugos del Valle entity sold its operations to The Coca-Cola Company, Coca-Cola FEMSA and other bottlers ofCoca-Cola trademark brands in Brazil. These still beverage operations were integrated into a joint business with The Coca-Cola Company in Brazil. Through Coca-Cola FEMSA’s joint ventures with The Coca-Cola Company, we distribute the Jugos del Valle line of juice-based beverages and have begun to develop and distribute new products. As of December 31, 2011, 2010, 2009 and 2008, Coca-Cola FEMSA has a recorded investment of 19.8% of the capital stock of Jugos del Valle.
In April 2008, FEMSA shareholders approved a proposal to amend our bylaws in order to preserve the unit structure for our shares that has been in place since May 1998, and to maintain our existing share structure beyond May 11, 2008. Our bylaws previously provided that on May 11, 2008 our Series D-B Shares would convert into Series B Shares and our Series D-L Shares would convert into Series L Shares with limited voting rights. In addition, our bylaws provided that, on May 11, 2008, our current unit structure would cease to exist and each of our B Units would be unbundled into five Series B Shares, while each BD Unit would unbundle into three Series B Shares and two newly issued Series L Shares. Following the April 22, 2008 shareholder approvals, the automatic conversion of our share and unit structures no longer exist, and, absent shareholder action, our share structure will continue to be comprised of Series B Shares, which must represent not less than 51% of our outstanding capital stock, and Series D-B and Series D-L Shares, which together may represent up to 49% of our outstanding capital stock. Our Unit structure, absent shareholder action, will continue to consist of B Units, which bundle five Series B Shares, and BD Units, which bundle one Series B Share, two Series D-B Shares and two Series D-L Shares. See “Item 9. The Offer and Listing—Description of Securities.”
In May 2008, Coca-Cola FEMSA completed its acquisition of Refrigerantes Minas Gerais, Ltda., or REMIL, in Brazil for US$ 364.1 million, net of cash received, and assumed liabilities of US$ 196.9 million.
In January 2010, FEMSA announced that its Board of Directors unanimously approved a definitive agreement under which FEMSA would exchange its FEMSA Cerveza business for a 20% economic interest in Heineken, one of the world’s leading brewers. In April 2010, FEMSA announced the closing of the transaction, after Heineken N.V., Heineken Holding N.V. and FEMSA held their corresponding AGMs and approved the transaction. Under the terms of the agreement, FEMSA received 43,018,320 shares of Heineken Holding N.V. and 43,009,699 shares of Heineken N.V., with an additional 29,172,504 shares of Heineken N.V. (which shares we refer to as the Allotted Shares) to be delivered pursuant to an allotted share delivery instrument, or the ASDI. Heineken also assumed US$ 2.1 billion of indebtedness, including FEMSA Cerveza’s unfunded pension obligations. The Allotted Shares were delivered to FEMSA in several installments during 2010 and 2011, with the final installment delivered on October 5, 2011. As of December 31, 2011,2014, FEMSA’s interest in Heineken N.V. represented 12.53% of Heineken N.V.’s outstanding capital and 14.94% of Heineken Holding N.V.’s outstanding capital. The principal terms of the Heineken transaction documents are summarized belowcapital, resulting in “Item 10. Additional Information—Material Contracts.”
In February 2010, FEMSA signed an agreement with subsidiaries of The Coca-Cola Company to amend the shareholders agreement for Coca-Cola FEMSA. The purpose of the amendment is to set forth that the appointment and compensation of the chief executive officer and all officers reporting to the chief executive officer, as well as the adoption of decisions related to the ordinary operations of Coca-Cola FEMSA, shall only require a simple majority vote of the board of directors. Decisions related to extraordinary matters (such as business acquisitions or combinations in an amount exceeding US$ 100 million, among others) shall continue to require the vote of the majority of the board of directors, including the affirmative vote of two of the board members appointed by The Coca-Cola Company. The amendment was approved at Coca-Cola FEMSA’s extraordinary shareholders meeting on April 14, 2010, and is reflected in the bylaws of Coca-Cola FEMSA. This amendment was signed without transfer of any consideration. The percentage of our voting interest in our subsidiary Coca-Cola FEMSA remains the same after the signing of this amendment.
In April 2010, Heineken N.V. and Heineken Holding N.V. held their AGM, and approved the acquisition of 100% of the shares of the beer operations owned by FEMSA, under the terms announced in January 2010. The AGM of Heineken appointed, subject to the completion of the acquisition of FEMSA’s beer operations, Mr. Jose Antonio Fernández Carbajal as member of the Board of Directors of Heineken Holding N.V. and the Heineken Supervisory Board, and Mr. Javier Astaburuaga Sanjines as second representative in the Heineken Supervisory Board. Their appointments became effective on April 30, 2010.
In April 2010, FEMSA held its AGM, during which shareholders approved the transaction with Heineken. Shareholders approved the exchange of 100% of FEMSA’s beer operations in Mexico and Brazil for a 20% economic interest in the Heineken Group, and the assumption by Heineken of debt in the amount of US$2.1 billion, under the transaction terms described in January 2010.
In April 2010, FEMSA announced the closing of the transaction pursuant to which FEMSA agreed to exchange 100% of its beer operations for a 20% economic interest in the Heineken Group. The principal terms of the Heineken transaction documents are summarized below in “Item“Item 10. Additional Information—Material Contracts.”
In September 2010, FEMSA sold Promotora de Marcas Nacionales, S. de R.L. de C.V., which we refer to as Promotora, to The Coca-Cola Company. Promotora was the owner of theMundet brands of soft drinks in Mexico.
In September 2010, FEMSA signed definitive agreements with GPC III, B.V. to sell its flexible packaging and label operations, Grafo Regia, S.A. de C.V. This transaction was part of FEMSA’s strategy to divest non-core assets. The transaction was closed on December 31, 2010.
During the third quarter of 2010, Coca-Cola FEMSA completed a transaction with a Brazilian subsidiary of The Coca-Cola Company to produce, sell and distributeMatte Leão branded products. This transaction reinforced Coca-Cola FEMSA’s non-carbonated product offering through the platform that is operated by The Coca-Cola Company and its bottling partners in Brazil. As a part of the agreement, Coca-Cola FEMSA has been selling and distributing certainMatte Leão branded ready-to-drink products since the first quarter of 2010. As of April 20, 2012, Coca-Cola FEMSA had a 19.4% indirect interest in theMatte Leãobusiness in Brazil.
In March 2011, a consortium of investors formed by FEMSA, the Macquarie Mexican Infrastructure Fund and other investors, acquired Energía Alterna Istmeña, S. de R.L. de C.V., which we refer to as EAI, and Energía Eólica Mareña, S.A. de C.V., which we refer to as EEM, from subsidiaries of Preneal, S.A., which we refer to as Preneal. EAI and EEM together constitute the Mareña Renovables Wind Power Farm, a 396 megawatt late-stage wind energy project in the southeastern region of the State of Oaxaca. The Mareña Renovables Wind Power Farm is expected to be the largest wind power farm in Latin America.
In March 2011, Coca-Cola FEMSA, with The Coca-Cola Company and through Compañía Panameña de Bebidas S.A.P.I. de C.V., acquired Grupo Industrias Lácteas, which we refer to as Estrella Azul, a Panamanian company engaged for more than 50 years in the dairy and juice-based beverage categories. Coca-Cola FEMSA acquired a 50% interest and will continue to develop this business with The Coca-Cola Company. Beginning in April 2011, both The Coca-Cola Company and Coca-Cola FEMSA commenced the gradual integration of Estrella Azul into the existing beverage platform they share for the development of non-carbonated products in Panama.
In October 2011, Coca-Cola FEMSA merged with Administradora de Acciones del Noreste, S.A. de C.V., which constituted the beverage division of Grupo Tampico, S.A. de C.V. (which we refer to as Grupo Tampico) and was one of the largest family-ownedCoca-Cola product bottlers in Mexico, as calculated by sales volume. This franchise territory operates in the states of Tamaulipas, San Luis Potosí and Veracruz, as well as in certain parts of the states of Hidalgo, Puebla and Querétaro, and sold 155.7 million unit cases of beverages in 2011. The aggregate enterprise value at the announcement date of this transaction was Ps. 9,300 million. Grupo Tampico’s principal shareholders received 63.5 million newly issued Coca-Cola FEMSA Series L Shares. Coca-Cola FEMSA began to consolidate the beverage division of Grupo Tampico in its financial statements as of October 2011.
In December 2011, Coca-Cola FEMSA began the construction of a production plant in Minas Gerais, Brazil, which will requirewas completed and began operations in November 2014. This project required an investment of 250R$584 million Brazilian reais (equivalent to approximately US$ 140260 million). We expectIt is expected that the constructionplant will generate 800approximately 700 direct and indirect jobs. As of December 31, 2011, it was anticipated that the new plant would be completed within 18 months and begin operations in June 2013. The plant will beis located on a parcel of land 300,000320,000 square meters in size, and it is expected that by the end of 2015 the annual production capacity will be approximately 2.11.2 billion liters of sparkling beverages (or approximately 200 million unit cases), representing an increase of approximately 47%62% as compared to the current installed capacity of Coca-Cola FEMSA’s plant in Belo Horizonte, Brazil. The new plant will produce all of Coca-Cola FEMSA’s existing brands and presentations ofCoca-Cola products.
In December 2011,May 2012, Coca-Cola FEMSA merged with the beverage division of Corporación de los Ángeles, S.A. de C.V. (which we refer to as Grupo CIMSA), which division was a Mexican family-owned bottler ofCoca-Cola trademark products. This franchise territory operates mainly in the states of Morelos and Mexico, as well as in certain parts of the states of Guerrero and Michoacán, and sold 154.8 million unit cases of beverages in 2011. The aggregate enterprise value at the announcement date of this transaction was Ps. 11,000 million. A total of 75.4 million new Coca-Cola FEMSA Series L Shares were issued in connection with the transaction, and Coca-Cola FEMSA began to consolidate the beverage division of Grupo CIMSA in its financial statements as of December 2011. As part ofclosed its merger with the beverage division of Grupo CIMSA, Coca-Cola FEMSA acquired a 13.2% equity interest in Promotora Industrial Azucarera, S.A. de C.V., which we refer to as Piasa.
On December 15, 2011, Coca-Cola FEMSA entered into an agreement to merge the beverage division of Grupo Fomento Queretano, S.A.P.I. de C.V. (which we refer to Grupo Fomento Queretano) into Coca-Cola FEMSA. Grupo Fomento Queretano’s beverage division operateswith operations mainly in the Mexican state of Querétaro, as well as in parts of the states of Mexico, Hidalgo, and Guanajuato.
On September 24, 2012, FEMSA signed definitive agreements to sell its wholly owned subsidiary Industria Mexicana de Quimicos, S.A. de C.V. (which we refer to as Quimiproductos) to a Mexican subsidiary of Ecolab Inc. (NYSE: ECL). Quimiproductos manufactures and provides cleaning and sanitizing products and services related to food and beverage industrial processes, as well as water treatment. The merger agreementtransaction is consistent with FEMSA’s long-standing strategy to divest non-core businesses. Quimiproductos was approvedsold on December 31, 2012, resulting in a gain of Ps. 871 million.
In 2013, Coca-Cola FEMSA began the construction of a production plant in Tocancipá, Colombia, which was completed and began operations in February 2015. This project required an investment of 382 billion Colombian pesos (approximately US$ 194 million). Coca-Cola FEMSA expects that the plant will generate approximately 800 direct and indirect jobs. Certain permits are currently in process of being obtained, andCoca-Cola FEMSA expects to obtain these pending permits during 2015. Coca-Cola FEMSA is currently operating with water provided by boththe municipality, as an alternative source. The plant is located on a parcel of land 298,000 square meters in size, and it is expected that by the end of 2015, the annual production capacity will be approximately 730 million liters of sparkling beverages (or approximately 130 million unit cases), representing an increase of approximately 24% as compared to the current installed capacity of Coca-Cola FEMSA’s and Grupo Fomento Queretano’s boards of directors, and is subject to the approval of theComisión Federal de Competencia (the Mexican Antitrust Commission, or the CFC) and of the shareholders meetings of both companies. The transaction will involve the issuance of approximately 45.1 million newplants in Colombia.
On January 25, 2013, Coca-Cola FEMSA Series L Shares, and in addition Coca-Cola FEMSA will assume Ps. 1,221 million in net debt. Thisclosed the transaction is expected to be completed in the second quarter of 2012.
In February 2012, Coca-Cola FEMSA announced that it had entered into a 12-month exclusivity agreement with The Coca-Cola Company to evaluate the potential acquisition byacquire a 51% non-controlling majority stake in CCFPI for US$ 688.5 million (Ps. 8,904 million) in an all-cash transaction. Coca-Cola FEMSA has an option to acquire the remaining 49% stake in CCFPI at any time during the seven years following the closing date. Coca-Cola FEMSA also has a put option to sell its ownership in CCFPI to The Coca-Cola Company commencing on the fifth anniversary of the closing date and ending on the sixth anniversary of the closing date. Coca-Cola FEMSA currently manages the day-to-day operations of the business; however, during a controlling ownershipfour-year period ending January 25, 2017 the business plan and other operational decisions must be approved jointly with The Coca-Cola Company. Coca-Cola FEMSA currently recognizes the results of CCFPI using the equity method.
In May 2013, Coca-Cola FEMSA closed its merger with Grupo Yoli, one of the oldest family-owned Coca-Cola bottlers in Mexico, operating mainly in the state of Guerrero as well as in parts of the state of Oaxaca.
On May 2, 2013, FEMSA Comercio through one of its subsidiaries, Cadena Comercial de Farmacias, S.A.P.I. de C.V. (which we refer to as CCF), closed the acquisition of Farmacias YZA, a leading drugstore operator in Southeast Mexico, headquartered in Merida, Yucatan. The founding shareholders of Farmacias YZA hold a 25% stake in CCF. In a separate transaction, on May 13, 2013, CCF acquired Farmacias FM Moderna, a leading drugstore operator in the western state of Sinaloa.
In August 2013, Coca-Cola FEMSA closed its acquisition of Companhia Fluminense de Refrigerantes (which we refer to as Companhia Fluminense), a family owned franchise that operates in parts of the states of São Paulo, Minas Gerais and Rio de Janeiro in Brazil. Companhia Fluminense sold approximately 56.6 million unit cases (including beer) in the twelve months ended March 31, 2013.
In October 2013, the Board of Directors agreed to separate the roles of Chairman of the Board and Chief Executive Officer, ratifying José Antonio Fernández Carbajal as Executive Chairman of the Board and naming Carlos Salazar Lomelín as the new Chief Executive Officer of FEMSA.
In October 2013, Coca-Cola FEMSA closed its acquisition of Spaipa, the second largest family owned franchise in Brazil, with operations in the state of Paraná and in parts of the state of São Paulo.
In December 2013, FEMSA Comercio, through one of its subsidiaries, purchased the operating assets and trademarks of Doña Tota, a leading quick-service restaurant operator in Mexico. The founding shareholders of Doña Tota hold a 20% stake in the bottling operations owned by The Coca-Cola CompanyFEMSA Comercio subsidiary that now operates the Doña Tota business.
In December 2014, FEMSA Comercio through CCF, agreed to acquire 100% of Farmacias Farmacón, a regional pharmacy chain consisting of 213 stores in the Philippines. Both parties believe thatnorthwestern Mexican states of Sinaloa, Sonora, Baja California and Baja California Sur. The transaction is pending customary regulatory approvals, and is expected to close during the second quarter of 2015.
For more information on Coca-Cola FEMSA’s expertise and successful track record operating in fragmented markets and emerging economies could be effectively deployed in such territory, and contribute significantly toward expandingrecent transactions, see“Item 4. Information on the penetration of, and consumer preference for, The Company—Coca-Cola Company’s brands in that market. This exclusivity agreement does not require either party to enter into any transaction, and there can be no assurances that a definitive agreement will be executed.
On February 23, 2012, a wholly-owned subsidiary of Mitsubishi Corporation, and Stichting Depositary PGGM Infrastructure Funds, a pension fund managed by PGGM, acquired the 45% interest held by FEMSA in the parent companies of the Mareña Renovables Wind Power Farm. Certain subsidiaries of FEMSA, FEMSA Comercio and Coca-Cola FEMSA have entered into 20-year wind power supply agreements with the Mareña Renovables Wind Power Farm to purchase energy output produced by it. These agreements will remain in full force and effect. The sale of FEMSA’s participation as an investor will result in a gain.FEMSA.”
We conduct our business through our principal sub-holding companies as shown in the following diagram and table:
Principal Sub-holding Companies—Ownership Structure
As of March 31, 20122015
(1) | Compañía Internacional de Bebidas, S.A. de C.V., which we refer to as CIBSA. |
(2) | Percentage of issued and outstanding capital stock |
(3) | Ownership in CB Equity held through various FEMSA subsidiaries. |
(4) | Combined economic interest in Heineken N.V. and Heineken Holding N.V. |
The following table presents an overview of our operations by reportable segment and by geographic region:area:
Operations by Segment—Overview
Year Ended December 31, 20112014 and % of growth (decrease) vs. last year
(1)(in million of Mexican pesos, except for employees and percentages)
Coca-Cola FEMSA | FEMSA Comercio | CB Equity(2) | ||||||||||||||||||||||||||||||||||||||||||||||
(in millions of Mexican pesos, except for employees and percentages) | Coca-Cola FEMSA | FEMSA Comercio | CB Equity(1) | |||||||||||||||||||||||||||||||||||||||||||||
Total revenues | Ps.124,715 | 20.5 | % | Ps.74,112 | 19.0 | % | Ps. — | — % | Ps. 147,298 | (6 | %) | Ps. 109,624 | 12 | % | Ps. — | — | ||||||||||||||||||||||||||||||||
Income from operations | 20,152 | 18.0 | % | 6,276 | 20.7 | % | (7) | (133)% | ||||||||||||||||||||||||||||||||||||||||
Gross Profit | 68,382 | (6 | %) | 39,386 | 14 | % | — | — | ||||||||||||||||||||||||||||||||||||||||
Share of the (loss) profit of associates and joint ventures accounted for using the equity method, net of taxes | (125 | ) | (143 | %)(2) | 37 | 236 | % | 5,244 | 14 | % | ||||||||||||||||||||||||||||||||||||||
Total assets | 151,608 | 32.9 | % | 26,998 | 14.0 | % | 76,791 | 14.6% | 212,366 | (2 | %) | 43,722 | 10 | % | 85,742 | 4 | % | |||||||||||||||||||||||||||||||
Employees | 78,979 | 15.4 | % | 83,820 | 14.7 | % | — | N/a | 83,371 | (2 | %) | 110,671 | 7 | % | — | — |
(1) | CB Equity holds our Heineken N.V. and Heineken Holding N.V. shares. |
(2) | Reflects the percentage decrease between the gain of ps. 289 million recorded in 2013 and the loss of ps. 125 million recorded in 2014. |
Total Revenues Summary by Segment(1)
Year Ended December 31, | ||||||||||||
2011 | 2010 | 2009 | ||||||||||
(in millions of Mexican pesos) | ||||||||||||
Coca-Cola FEMSA | Ps.124,715 | Ps.103,456 | Ps.102,767 | |||||||||
FEMSA Comercio | 74,112 | 62,259 | 53,549 | |||||||||
CB Equity(2) | — | — | N/a | |||||||||
Other | 13,373 | 12,010 | 10,991 | |||||||||
Consolidated total revenues(3) | Ps.203,044 | Ps.169,702 | Ps.160,251 |
Total Revenues Summary by Geographic Region(4)(5)
Year Ended December 31, | ||||||||||||
2011 | 2010 | 2009 | ||||||||||
Mexico and Central America(3)(6) | Ps.130,256 | Ps.111,769 | Ps.101,023 | |||||||||
South America(3)(7) | 53,113 | 44,468 | 37,507 | |||||||||
Venezuela | 20,173 | 14,048 | 22,448 | |||||||||
Consolidated total revenues(3) | Ps.203,044 | Ps.169,702 | Ps.160,251 |
Year Ended December 31, | ||||||||||||
2014 | 2013 | 2012 | ||||||||||
Coca-Cola FEMSA | Ps.147,298 | Ps. 156,011 | Ps. 147,739 | |||||||||
FEMSA Comercio | 109,624 | 97,572 | 86,433 | |||||||||
Other | 20,069 | 17,254 | 15,899 | |||||||||
Consolidated total revenues | Ps. 263,449 | Ps. 258,097 | Ps. 238,309 |
(1) | The sum of the financial data for each of our segments and percentages with respect thereto differ from our consolidated financial information due to intercompany transactions, which are eliminated in consolidation, and certain assets and activities of FEMSA. |
Total Revenues Summary by Geographic Area(1)
Year Ended December 31, | ||||||||||||
2014 | 2013 | 2012 | ||||||||||
Mexico and Central America(2) | Ps. 186,736 | Ps. 171,726 | Ps. 155,576 | |||||||||
South America(3) | 69,172 | 55,157 | 56,444 | |||||||||
Venezuela | 8,835 | 31,601 | 26,800 | |||||||||
Consolidated total revenues | 263,449 | 258,097 | 238,309 |
The sum of the financial data for each geographic |
Central America includes Guatemala, Nicaragua, Costa Rica and Panama. Domestic (Mexico-only) revenues were Ps. |
The following table sets forth our significant subsidiaries as of February 29, 2012:December 31, 2014:
Name of Company | Jurisdiction of Establishment | Percentage Owned | ||||
| Mexico | 100.0 | % | |||
Coca-Cola FEMSA | Mexico | 47.9 | %(1) | |||
Emprex: | Mexico | 100.0 | % | |||
FEMSA Comercio | Mexico | 100.0 | % | |||
| ||||||
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| ||||||
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| United Kingdom | 100.0 | % |
(1) | Percentage of capital stock. FEMSA, through CIBSA, owns 63.0% of the |
(2) | Ownership in CB Equity held through various FEMSA subsidiaries. CB Equity holds our Heineken N.V and Heineken Holding N.V. shares. |
FEMSA is a leading company that participates in the non-alcoholic beverage industry through Coca-Cola FEMSA, the largest independentfranchise bottler ofCoca-Cola products in the world in terms of sales volume; in the retail industry through FEMSA Comercio, operating the largest and fastest-growing chain of convenience stores in Latin America;world; and in the beer industry, through its ownership of the second-largestsecond largest equity stake in Heineken, one of the world’s leading brewers with operations in over 70 countries. In the retail industry FEMSA participates with FEMSA Comercio, operating various small-format store chains including OXXO, the largest and fastest-growing in the Americas. Additionally, through its strategic businesses, FEMSA provides logistics, point-of-sale refrigeration solutions and plastics solutions to FEMSA’s business units and third-party clients.
We understand the importance of connecting with our end consumers by interpreting their needs, and ultimately delivering the right products to them for the right occasions and the optimal value proposition. We strive to achieve this by developing brand value, expanding our significant distribution capabilities, and improving the efficiency of our operations while aiming to reach our full potential. We continue to improve our information gathering and processing systems in order to better know and understand what our consumers want and need, and we are improving our production and distribution by more efficiently leveraging our asset base.
We believe that the competencies that our businesses have developed can be replicated in other geographic regions. This underlying principle guided our consolidation efforts, which culminated in Coca-Cola FEMSA’s acquisition of Panamco in May 2003. Theled to our current continental platform that this combination produced—encompassing a significant territorial expansefootprint. We have presence in Mexico, Central and CentralSouth America and the Philippines including some of the most populous metropolitan areas in Latin America—which has provided us with opportunities to create value through both an improved ability to execute our strategies and the use of superior marketing tools. We have also increased our capabilities to operate and succeed in other geographic regions, by developing significant management and marketing tools to gain an understanding of local consumer needs and trends, as is the case with OXXO’s new Colombian operations.needs. Going forward, we intend to use those capabilities to continue our international expansion of both Coca-Cola FEMSA and OXXO.FEMSA Comercio, expanding both our geographic footprint and our presence in the non-alcoholic beverage industry and small box retail formats, as well as taking advantage of potential opportunities to leverage our skill set and key competencies.
Our ultimate objectives are achieving sustainable revenue growth, improving profitabilityobjective is to create economic, social and increasing the return on invested capital in each of our operations. We believe that by achieving these goals we will create sustainableenvironmental value for our shareholders.stakeholders—including our employees, our consumers, our shareholders and the enterprises and institutions within our society—now and into the future.
Overview
Coca-Cola FEMSA is the largest franchise bottler ofCoca-Colatrademark beverages in the world. Coca-Cola FEMSAIt operates in territories in the following territories:countries:
Mexico – a substantial portion of central Mexico, (including Mexico City and the states of Michoacán and Guanajuato) and the southeast and northeast of Mexico (including the Gulf region).
Central America – Guatemala (Guatemala City and surrounding areas), Nicaragua (nationwide), Costa Rica (nationwide) and Panama (nationwide).
Colombia – most of the country.
Venezuela – nationwide.
Brazil – a major part of the areastates of greater São Paulo Campinas, Santos,and Minas Gerais, the statestates of Paraná and Mato Grosso do Sul part of the state of Minas Gerais and part of the statestates of Rio de Janeiro and Goiás.
Argentina – Buenos Aires and surrounding areas.
Philippines – nationwide (through a joint venture with The Coca-Cola Company).
Coca-Cola FEMSA was organizedincorporated on October 30, 1991 as a stock corporation with variable capital (sociedad anónima de capital variable (a variable capital stock corporation)) under the laws of Mexico withfor a durationterm of 99 years. On December 5, 2006, as required by amendments to the Mexican Securities Market Law, Coca-Cola FEMSA became a publicly traded stock corporation with variable capital (sociedad anónima bursátil de capital variable (a listed variable capital stock corporation)). Coca-Cola FEMSA’s legal name is Coca-Cola FEMSA, S.A.B. de C.V. Coca-Cola FEMSA’s principal executive offices are located at Guillermo González CamarenaCalle Mario Pani No. 600, Col. Centro de Ciudad100, Colonia Santa Fe Cuajimalpa, Delegación Álvaro Obregón,Cuajimalpa de Morelos, 05348, México, D.F., 01210, México. Coca-Cola FEMSA’s telephone number at this location is (52-55) 5081-5100.1519-5000. Coca-Cola FEMSA’s website is www.coca-colafemsa.com.www.coca-colafemsa.com.
The following is an overview of Coca-Cola FEMSA’s operations by consolidated reporting segment in 2011.2014.
Operations by Consolidated Reporting Segment—Overview
Year Ended December 31, 2011(1)2014
Total Revenues | Percentage of Total Revenues | Income from Operations | Percentage of Income from Operations | Total Revenues (millions of Mexican pesos) | Percentage of Total Revenues | Gross Profit (millions of Mexican pesos) | Percentage of Gross Profit | |||||||||||||||||||||||||
Mexico and Central America | 52,196 | 41.9 | % | 8,906 | 44.2 | % | 71,965 | 48.9 | % | 36,453 | 53.3 | % | ||||||||||||||||||||
South America (excluding Venezuela)(3) | 52,408 | 42.0 | % | 7,943 | 39.4 | % | ||||||||||||||||||||||||||
South America(2) (excluding Venezuela) | 66,367 | 45.0 | % | 27,372 | 40.0 | % | ||||||||||||||||||||||||||
Venezuela | 20,111 | 16.1 | % | 3,303 | 16.4 | % | 8,966 | 6.1 | % | 4,557 | 6.7 | % | ||||||||||||||||||||
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Consolidated | 124,715 | 100.0 | % | 20,152 | 100.0 | % | 147,298 | 100.0 | % | 68,382 | 100.0 | % |
(1) |
Includes Mexico, Guatemala, Nicaragua, Costa Rica and Panama. |
Includes Colombia, Brazil and Argentina. |
Corporate History
InCoca-Cola FEMSA commenced operations in 1979, when one of our subsidiaries acquired certain sparkling beverage bottlers that are now a part of Coca-Cola FEMSA. At that time, the acquired bottlers had 13 Mexican distribution centers operating 701 distribution routes, and their production capacity was 83 million physical cases.bottlers. In 1991, FEMSAwe transferred itsour ownership in the bottlers to FEMSA Refrescos, S.A. de C.V., the corporate predecessor ofto Coca-Cola FEMSA, S.A.B. de C.V.
In June 1993, a subsidiary of The Coca-Cola Company subscribed for 30% of Coca-Cola FEMSA’s capital stock in the form of Series D Shares for US$ 195 million.shares. In September 1993, FEMSAwe sold Series L Sharesshares that
represented 19%19.0% of Coca-Cola FEMSA’s capital stock to the public, and Coca-Cola FEMSA listed these shares on the Mexican Stock Exchange and, in the form of ADSs, on the NYSE. New York Stock Exchange.
In a series of transactions betweensince 1994, and 1997, Coca-Cola FEMSA has acquired new territories, in Argentinabrands and additional territories in southern Mexico.
other businesses which today comprise Coca-Cola FEMSA’s business. In May 2003, Coca-Cola FEMSA acquired Panamco and began producing and distributingCoca-Colatrademark beverages in additional territories in the central and the gulf regions of Mexico and in Central America (Guatemala, Nicaragua, Costa Rica and Panama), Colombia, Venezuela and Brazil, along with bottled water, beer and other beverages in some of these territories. As a result of the acquisition, the interest of The Coca-Cola Company in the capital stock of Coca-Cola FEMSA increased from 30.0% to 39.6%.
During August 2004, Coca-Cola FEMSA conducted a rights offering to allow existing holders of its Series L Shares and ADSs to acquire newly-issued Series L Shares in the form of Series L Shares and ADSs, respectively, at the same price per share at which we and The Coca-Cola Company subscribed in connection with the Panamco acquisition. In March 2006, its shareholders approved the non-cancellation of the 98,684,857 Series L Shares (equivalent to approximately 9.87 million ADSs, or over one-third of the issued Series L Shares at the time) that were not subscribed for in the rights offering which were available for subscription at a price of no less than US$ 2.216 per share or its equivalent in Mexican currency.
In November 2006, we acquired through a subsidiary, 148,000,000 of Coca-Cola FEMSAFEMSA’s Series D Sharesshares from certain subsidiaries of The Coca-Cola Company, representing 9.4% of the total outstanding voting shares and 8.0% of the total outstanding equitywhich increased our ownership of Coca-Cola FEMSA at a price of US$ 2.888 per share for an aggregate amount of US$ 427.4 million. With this purchase, we increased our ownership to 53.7% of Coca-Cola FEMSA’s capital stock. Pursuant to Coca-Cola FEMSA’s bylaws, the acquired shares were converted from Series D Shares to Series A Shares..
In November 2007, Administración, S.A.P.I., a Mexican company owned directly or indirectly by Coca-Cola FEMSA andacquired together with The Coca-Cola Company acquired 100% of the shares of capital stock of Jugos del Valle. See “—The Company—Background.” The business ofValle, S.A.P.I. de C.V., or Jugos del Valle in the United States was acquired and sold by TheValle. In 2008, Coca-Cola Company. Subsequently, Coca-Cola FEMSA, and The Coca-Cola Company and all Mexican and BrazilianCoca-Cola bottlers entered into a joint business for the Mexican and the Brazilian operations, respectively, of JugosJuegos del Valle, through transactions completed during 2008. Taking into account the participations held by the beverage divisions of Grupo Tampico and Grupo CIMSA, Coca-Cola FEMSA currently holds an interest of 24.0% in the Mexican joint business and approximately 19.7% in the Brazilian joint businesses of Jugos del Valle. Jugos del Valle sells fruit juice-based beverages and fruit derivatives.
In May 2008, Coca-Cola FEMSA entered into a transaction with The Coca-Cola Company to acquire its wholly-owned bottling franchise REMIL, located in the State of Minas Gerais in Brazil, and Coca-Cola FEMSA paid a purchase price of US$ 364.1 million in June 2008. Coca-Cola FEMSA began to consolidate REMIL in its financial statements as of June 1, 2008.
In December 2007 and May 2008, Coca-Cola FEMSA sold most of its proprietary brands to The Coca-Cola Company. The proprietary brands are now being licensed back to Coca-Cola FEMSA by The Coca-Cola Company pursuant to Coca-Cola FEMSA’sits bottler agreements. The December 2007 transaction was valued at US$ 48 million and the
In May 2008, transaction was valued at US$ 16 million. Coca-Cola FEMSA believes that bothentered into a transaction with The Coca-Cola Company to acquire its wholly owned bottling franchise Refrigerantes Minas Gerais, Ltda., or REMIL, located in the State of these transactions were conducted on an arm’s length basis. Revenues from the sale of proprietary brandsMinas Gerais in which Coca-Cola FEMSA has a significant continuing involvement are deferred and amortized against the related costs of future sales over the estimated sales period.Brazil.
In July 2008, Coca-Cola FEMSA acquired the jugAgua De Los Angeles bulk water business of Agua de los Ángeles, S.A. de C.V., or Agua de los Ángeles, in the Valley of Mexico (Mexico City and surrounding areas) from Grupo Embotellador CIMSA, S.A. de C.V., at the time one of theCoca-Cola bottling franchises in Mexico, for a purchase price of US$ 18.3 million.Mexico. The trademarks remain with The Coca-Cola Company. Coca-Cola FEMSA subsequently merged Agua de los ÁngelesDe Los Angeles into its jugbulk water business under theCielbrand.
In February 2009, Coca-Cola FEMSA together with The Coca-Cola Company acquired the Brisa bottled water business in Colombia from Bavaria, S.A., a subsidiary of SABMiller.SABMiller plc. Coca-Cola FEMSA acquired the production
assets and the distribution territory and The Coca-Cola Company acquired theBrisa brand. Coca-Cola FEMSA and The Coca-Cola Company equally shared in paying the purchase price of US$ 92 million. Following a transition period, in June 2009, Coca-Cola FEMSA started to sell and distribute theBrisa portfolio of products in Colombia.
In May 2009, Coca-Cola FEMSA entered into an agreement to developmanufacture, distribute and sell theCrystal trademark water products in Brazil jointly with The Coca-Cola Company.
In August 2010, Coca-Cola FEMSA acquired from The Coca-Cola Company along with other BrazilianCoca-Cola bottlers the business operationsLeão Alimentos e Bebidas, Ltda. or Leão Alimentos, manufacturer and distributor of theMatte Leãotea brand. As of April 20, 2012, Coca-Cola FEMSA had a 19.4% indirect interest in theMatte Leão business in Brazil.
In March 2011, Coca-Cola FEMSA together with The Coca-Cola Company and through Compañía Panameña de Bebidas S.A.P.I. de C.V., acquired Grupo Industrias Lacteas, S.A. (also known as Estrella Azul,Azul), a Panamanian conglomerate that participates in the dairy and juice-based beverage categories in Panama. Coca-Cola FEMSA will continue to develop this business with The Coca-Cola Company.
In October 2011, Coca-Cola FEMSA merged with the beverage division of Administradora de Acciones del Noreste, S.A. de C.V., which constituted Grupo Tampico’s beverage division and wasTampico, one of the largest family-owned bottlers ofCoca-Cola trademark productsbottlers in Mexico as calculated byin terms of sales volume. This franchise territory operatesvolume with operations in the states of Tamaulipas, San Luis Potosí, and Veracruz, as well as in certain parts of the states of Hidalgo, Puebla and Querétaro, and sold 155.7 million unit cases of beverages in 2011. The aggregate enterprise value at the announcement date of this transaction was Ps. 9,300 million, and a total of 63.5 million new Coca-Cola FEMSA Series L Shares were issued in connection with the transaction. Coca-Cola FEMSA began to consolidate the beverage division of Grupo Tampico in its financial statements as of October 2011.Queretaro.
In December 2011, Coca-Cola FEMSA merged with the beverage division of Grupo CIMSA and its shareholders, a Mexican family-owned bottler ofCoca-Cola trademark productsbottler with operations mainly in the states of Morelos and México,Mexico, as well as in certain parts of the states of Guerrero and Michoacán. This franchise territory sold 154.8 million unit cases of beverages in 2011. The aggregate enterprise value of this transaction was Ps. 11,000 million, and a total of 75.4 million new Coca-Cola FEMSA Series L Shares were issued in connection with this transaction. Coca-Cola FEMSA began to consolidate the beverage division of Grupo CIMSA in its financial statements as of December 2011. As part of Coca-Cola FEMSA’sits merger with the beverage division of Grupo CIMSA, itCoca-Cola FEMSA also acquired a 13.2% equity interest in Piasa.Promotora Industrial Azucarera, S.A de C.V., or PIASA.
Recent Mergers and Acquisitions
On December 15, 2011,In May 2012, Coca-Cola FEMSA entered into an agreement to merge the beverage division ofmerged with Grupo Fomento Queretano, into Coca-Cola FEMSA. Grupo Fomento Queretano’sone of the oldest family-owned beverage division operatesplayers in theCoca-Cola system in Mexico, with operations mainly in the Mexican state of Querétaro, as well as in parts of the states of Mexico, Hidalgo and Guanajuato. The merger agreement was approved by bothFor further information, see Note 4 to our audited consolidated financial statements. As part of Coca-Cola FEMSA’s andmerger with Grupo Fomento Queretano’s boards of directors, and is subject to the approval of the CFC and of the shareholders meetings of both companies. The transaction will involve the issuance of approximately 45.1 million new Coca-Cola FEMSA Series L Shares, andQueretano it also acquired an additional 12.9% equity interest in addition Coca-Cola FEMSA will assume Ps. 1,221 million in net debt. This transaction is expected to be completed in the second quarter of 2012.PIASA.
In FebruaryAugust 2012, Coca-Cola FEMSA entered intoacquired, through Jugos del Valle, an indirect participation in Santa Clara Mercantil de Pachuca, S.A. de C.V., or Santa Clara, a 12-month exclusivity agreementproducer of milk and dairy products in Mexico.
In January 2013, Coca-Cola FEMSA together with The Coca-Cola Company to evaluate the potential acquisition byacquired a 51% non- controlling majority stake in CCFPI in an all-cash transaction.
In May 2013, Coca-Cola FEMSA merged with Grupo Yoli, one of the oldest family-owned Coca-Cola bottlers in Mexico, with operations mainly in the state of Guerrero as well as in parts of the state of Oaxaca. For further information, see Note 4 to our audited consolidated financial statements. As part of its merger with Grupo Yoli, Coca-Cola FEMSA also acquired an additional 10.1% equity interest in PIASA for a controllingtotal ownership of 36.3%.
In August 2013, Coca-Cola FEMSA acquired Companhia Fluminense, a family owned franchise that operates in parts of the states of São Paulo, Minas Gerais and Rio de Janeiro in Brazil. For further information, see Note 4 to our audited consolidated financial statements. As part of Coca-Cola FEMSA’s acquisition of Companhia Fluminense, Coca-Cola FEMSA also acquired an additional 1.2% equity interest in Leão Alimentos.
In October 2013, Coca-Cola FEMSA acquired Spaipa, the second largest family owned franchise in Brazil, with operations in the state of Paraná and in parts of the state of São Paulo. For further information, see Note 4 to our audited consolidated financial statements. As part of its acquisition of Spaipa, Coca-Cola FEMSA also acquired an additional 5.8% equity interest in Leão Alimentos, for a total ownership as of April 10, 2015 of 24.4%, and a 50.0% stake in Fountain Água Mineral Ltda., a joint venture to develop the bottling operations owned bywater category together with The Coca-Cola Company in the Philippines.Company.
For further information see “Item 7. Major Shareholders and Related Party Transactions—Related Party Transactions—Business Transactions between Coca-Cola FEMSA, remains in the process of evaluating this potential acquisition.FEMSA and The Coca-Cola Company.”
Capital Stock
As of April 20, 2012,17, 2015, we indirectly owned Series A Sharesshares equal to 47.9% of Coca-Cola FEMSA equal to 50.0% of itsFEMSA’s capital stock (63.0% of itsCoca-Cola FEMSA’s capital stock with full voting rights). As of April 20, 2012,17, 2015, The Coca-Cola Company indirectly owned Series D Sharesshares equal to 28.1% of the capital stock of Coca-Cola FEMSA equal to 29.4% of its capital stock (37.0% of itsthe capital stock with full voting rights). Series L Sharesshares with limited voting rights, which trade on the Mexican Stock Exchange and/orand in the form of ADSs on the NYSE, constitutedNew York Stock Exchange, constitute the remaining 20.6%24.0% of Coca-Cola FEMSA’s capital stock.
Business Strategy
Coca-Cola FEMSA operates with a large geographic footprint in Latin America. In August 2011,January 2015, Coca-Cola FEMSA restructured its businessoperations under twofour new divisions: (1) Mexico (covering certain territories in Mexico); (2) Latin America (covering certain territories in Guatemala, and Central America;all of Nicaragua, Costa Rica and South America, creatingPanama, certain territories in Argentina, most of Colombia and all of Venezuela), (3) Brazil (covering a major part of the states of São Paulo and Minas Gerais, the states of Paraná and Mato Grosso do Sul and part of the states of Rio de Janeiro and Goiás), and (4) Asia (covering all of the Philippines through a joint venture with The Coca-Cola Company). Through these divisions, Coca-Cola FEMSA has created a more flexible structure to execute its strategies and extend Coca-Cola FEMSA’scontinue with its track record of growth. Previously, Coca-Cola FEMSA managed its business under three divisions: Mexico; Latincentro; and Mercosur. With this new business structure, Coca-Cola FEMSAhas also aligned its business strategies more efficiently, ensuring a faster introduction of new products and categories, and a more rapid and effective design and deployment of commercial models.
Coca-Cola FEMSA operates with a large geographic footprint in Latin America in two divisions:
Mexico and Central America (covering certain territories in Mexico, Guatemala, Nicaragua, Costa Rica and Panama); and
South America (covering certain territories in Colombia, Brazil, Venezuela and Argentina).
One of Coca-Cola FEMSA’s goals is to maximize growth and profitability to create value for its shareholders. ItsCoca-Cola FEMSA’s efforts to achieve this goal are based on: (1) transforming Coca-Cola FEMSA’sits commercial models to focus on its customers’ value potential and using a value-based segmentation approach to capture the industry’s value potential; (2) implementing multi-segmentation strategies in its major markets to target distinct market clusters divided by consumption occasion, competitive intensity and socioeconomic levels; (3) implementing well-planned product, packaging and pricing strategies through different distribution channels; (4) driving product innovation along its different product categories; (5) developing new businesses and distribution channels; and (6) achieving the full operating potential of its commercial models and processes to drive operational efficiencies throughout its company. To achieveIn furtherance of these goals,efforts, Coca-Cola FEMSA intends to continue to focus its efforts on, among other initiatives, the following:
working with The Coca-Cola Company to develop a business model to continue exploring and participating in new lines of beverages, extending existing product lines and effectively advertising and marketing its products;
developing and expanding its still beverage portfolio through innovation, strategic acquisitions and by entering into agreements to acquire companies with The Coca-Cola Company;
expanding its bottled water strategy with The Coca-Cola Company through innovation and selective acquisitions to maximize profitability across its market territories;
strengthening its selling capabilities and go-to-market strategies, including pre-sale, conventional selling and hybrid routes, in order to get closer to its clients and help them satisfy the beverage needs of consumers;
• | implementing selective packaging strategies designed to increase consumer demand for its products and to build a strong returnable base for theCoca-Cola brand; |
replicating its best practices throughout the value chain;
rationalizing and adapting its organizational and asset structure in order to be in a better position to respond to a changing competitive environment;
committing to building a multi-cultural collaborative team, from top to bottom; and
broadening its geographic footprint through organic growth and strategic joint ventures, mergers and acquisitions.
Coca-Cola FEMSA seeks to increase per capita consumption of its products in the territories in which it operates. To that end, itsCoca-Cola FEMSA’s marketing teams continuously develop sales strategies tailored to the different characteristics of its various territories and distribution channels. Coca-Cola FEMSA continues to develop its product portfolio to better meet market demand and maintain its overall profitability. To stimulate and respond to consumer demand, Coca-Cola FEMSA continues to introduce new categories, products and presentations.See “—Product and Packaging Mix.” In addition, because Coca-Cola FEMSA views its relationship with The Coca-Cola Company as integral to its business, Coca-Cola FEMSA uses market information systems and strategies developed with The Coca-Cola Company to improve its business and marketing strategies.See “—Marketing.”
Coca-Cola FEMSA also continuously seeks to increase productivity in its facilities through infrastructure and process reengineering for improved asset utilization. ItsCoca-Cola FEMSA’s capital expenditure program includes investments in production and distribution facilities, bottles, cases, coolers and information systems. Coca-Cola FEMSA believes that this program will allow it to maintain its capacity and flexibility to innovate and to respond to consumer demand for its products.
In early 2015, Coca-Cola FEMSA redesigned its corporate structure to strengthen the core functions of its organization. Through this restructuring, Coca-Cola FEMSA created specialized departments, focused on its supply chain, commercial, and IT innovation areas (centros de excelencia). These departments not only enable centralized collaboration and knowledge sharing, but also drive standards of excellence and best practices in Coca-Cola FEMSA’s key strategic capabilities. Coca-Cola FEMSA’s priorities include enhanced manufacturing efficiency, improved distribution and logistics, and cutting-edge IT-enabled commercial innovation.
Coca-Cola FEMSA focuses on management quality as a key element of its growth strategy and remains committed to fostering the development of quality management at all levels. Both weCoca-Cola FEMSA’s Strategic Talent Management Model is designed to enable it to reach its full potential by developing the capabilities of its employees and Theexecutives. This holistic model works to build the skills necessary for Coca-Cola Company provideFEMSA’s employees and executives to reach their maximum potential, while contributing to the achievement of its short- and long-term objectives. To support this capability development model, Coca-Cola FEMSA with managerial experience. To build uponFEMSA’s board of directors has allocated a portion of its yearly operating budget to fund these skills, Coca-Cola FEMSA also offers management training programs designed to enhance its executives’ abilities and to provide a forum for exchanging experiences, know-how and talent among an increasing number of multinational executives from its new and existing territories.programs.
Sustainable development is an integrala comprehensive part of Coca-Cola FEMSA’s strategic framework for business operation and growth. Coca-Cola FEMSA bases its efforts in its core foundation, its ethics and values. Coca-Cola FEMSA focuses on fivethree core areas:areas, (i) Ethics and Corporate Values, which defines its commitment to acting, defining and organizing itself based on its corporate values and culture; (ii) Quality of Life inpeople, by encouraging the Company, which encourages the integralcomprehensive development of its employees and their families; (iii) Health and Wellness, to promote(ii) its communities, by promoting the generation of sustainable communities in which it serves, an attitude of health, self-care, adequate nutrition and physical activity, both within and outsideevaluating the company; (iv) Community Engagement, to develop educationimpact of its value chain; and learning projects that improve(iii) the quality of life
in the communities where Coca-Cola FEMSA operates; and (v) Environmental Care, to establishplanet, by establishing guidelines that it believes will result in actionsefficient use of natural resources to minimize the impact that Coca-Cola FEMSA’sits operations might have on the environment and create a broader awareness of caring for the environment.
CCFPI Joint Venture
On January 25, 2013, as part of Coca-Cola FEMSA’s efforts to expand its geographic reach, it acquired a 51% non-controlling majority stake in CCFPI. Coca-Cola FEMSA currently manages the day-to-day operations of the business; however, during a four-year period ending January 25, 2017 the business plan and other operational decisions must be approved jointly with The Coca-Cola Company. As of December 31, 2014, Coca-Cola FEMSA’s investment under the equity method in CCFPI was Ps. 9,021 million. See Notes 10 and 26 to our audited consolidated financial statements. Coca-Cola FEMSA’s product portfolio in the Philippines consists ofCoca-Cola trademark beverages and Coca-Cola FEMSA’s total sales volume in 2014 reached 513 million unit cases. The operations of CCFPI are comprised of 19 production plants and serve close to 853,242 customers.
The Philippines has one of the highest per capita consumption rates ofCoca-Cola products in the region and presents significant opportunities for further growth.Coca-Cola has been present in the Philippines since the start of the 20th century and since 1912 it has been locally producingCoca-Colaproducts. The Philippines received the first Coca-Cola bottling and distribution franchise in Asia. Coca-Cola FEMSA’s strategic framework for growth in the Philippines is based on three pillars: portfolio, route to market and supply chain.
Coca-Cola FEMSA’s Territories
The following map shows Coca-Cola FEMSA’s territories, giving estimates in each case of the population to which it offersoffer products, the number of retailers of its beverages and the per capita consumption of its beverages as of December 31, 2011:2014:
Per capita consumption data for a territory areis determined by dividing total beverage sales volume within the territory (in bottles, cans and fountain containers)unit cases) by the estimated population within such territory, and areis expressed on the basis of the number of eight-ounce servings of Coca-Cola FEMSAFEMSA’s products consumed annually per capita. In evaluating the development of local volume sales in itsCoca-Cola FEMSA’s territories and to determine product potential, Coca-Cola FEMSA and The Coca-Cola Company measure, among other factors, the per capita consumption of all of Coca-Cola FEMSA’stheir beverages.
Coca-Cola FEMSA’s Products
Coca-Cola FEMSA produces, markets, sells and distributesCoca-Cola trademark beverages. TheseTheCoca-Cola trademark beverages include: sparkling beverages (colas and flavored sparkling beverages), waters and still beverages (including juice drinks, coffee, teas, milk, value-added dairy and isotonics)isotonic drinks). The following table sets forth Coca-Cola FEMSA’s main brands as of December 31, 2011:2014:
Colas: | Mexico and Central America(1) | South America(2) | Venezuela | |||
Coca-Cola | ü | ü | ü | |||
Coca-Cola Light | ü | ü | ü | |||
Coca-Cola Zero | ü | ü | ||||
Coca-Cola Life | ü | ü | ||||
Flavored sparkling beverages: | Mexico and Central America(1) | South America(2) | Venezuela | |||
Ameyal | ü | |||||
Canada Dry | ü | |||||
Chinotto | ü | |||||
Crush | ü | |||||
Escuis | ü | |||||
Fanta | ü | ü | ||||
Fresca | ü | |||||
Frescolita | ü | ü | ||||
Hit | ü | |||||
Kist | ü | |||||
Kuat | ü | |||||
Lift | ü | |||||
Mundet | ü | |||||
Quatro | ü | |||||
Schweppes | ü | ü | ü | |||
Simba | ü | |||||
Sprite | ü | ü | ||||
| ü | |||||
Yoli | ü | |||||
Water: | Mexico and Central America(1) | South America(2) | Venezuela | |||
Alpina | ü | |||||
Aquarius(3) | ü | |||||
Bonaqua | ü | |||||
Brisa | ü | |||||
Ciel | ü | |||||
Crystal | ü | |||||
Dasani | ü | |||||
Manantial | ü | |||||
Nevada | ü |
Other Categories: | Mexico and Central America(1) | South America(2) | Venezuela | ||||||
Cepita | |||||||||
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Del Prado | ü | ||||||||
Estrella Azul(6) | ü | ||||||||
FUZE Tea | ü | ü | |||||||
Hi-C(7) | ü | ü | |||||||
Santa Clara(8) | ü | ||||||||
Jugos del Valle(4) | ü | ü | ü | ||||||
Matte Leão(9) | ü | ||||||||
Powerade(10) | ü | ü | ü | ||||||
Valle Frut(11) | ü | ü | ü |
(1) | Includes Mexico, Guatemala, Nicaragua, Costa Rica and Panama. |
(2) | Includes Colombia, Brazil and Argentina. |
(3) | Flavored water. In Brazil, also a flavored sparkling beverage. |
(4) | Juice-based beverage. |
(5) | Juice-based beverage in Central America. |
(6) | Milk and value-added dairy and juices. |
(7) | Juice-based beverage. Includes Hi-C Orangeade in Argentina. |
Ready to drink tea. |
Isotonic drinks. |
(11) | Orangeade. IncludesDel Valle Freshin Costa Rica, Nicaragua, Panama, Colombia and Venezuela. |
Sales Overview
Coca-Cola FEMSA measures total sales volume in terms of unit cases. One unit case“Unit case” refers to 192 ounces of finished beverage product (24 eight-ounce servings) and, when applied to soda fountains, refers to the volume of syrup, powders and concentrate that is required to produce 192 ounces of finished beverage product. The following table illustrates Coca-Cola FEMSA’s historical sales volume for each of its consolidated territories.
Sales Volume Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||||||
2011 | 2010 | 2009 | 2014 | 2013 (1) | 2012(2) | |||||||||||||||||||
(millions of unit cases) | (millions of unit cases) | |||||||||||||||||||||||
Mexico and Central America | ||||||||||||||||||||||||
Mexico | 1,366.5 | 1,242.3 | 1,227.2 | 1,754.9 | 1,798.0 | 1,720.3 | ||||||||||||||||||
Central America(2) | 144.3 | 137.0 | 135.8 | |||||||||||||||||||||
Central America(3) | 163.6 | 155.6 | 151.2 | |||||||||||||||||||||
South America (excluding Venezuela) | ||||||||||||||||||||||||
Colombia | 252.1 | 244.3 | 232.2 | 298.4 | 275.7 | 255.8 | ||||||||||||||||||
Brazil(4) | 485.3 | 475.6 | 424.1 | |||||||||||||||||||||
Brazil(4) | 733.5 | 525.2 | 494.2 | |||||||||||||||||||||
Argentina | 210.7 | 189.3 | 184.1 | 225.8 | 227.1 | 217.0 | ||||||||||||||||||
Venezuela | 189.8 | 211.0 | 225.2 | 241.1 | 222.9 | 207.7 | ||||||||||||||||||
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Combined Volume | 2,648.7 | 2,499.5 | 2,428.6 | |||||||||||||||||||||
Consolidated Volume | 3,417.3 | 3,204.5 | 3,046.2 |
(1) | Includes |
(2) | Includes volume from the operations of Grupo Fomento Queretano from May 2012. |
(3) | Includes Guatemala, Nicaragua, Costa Rica and Panama. |
(4) | Excludes beer sales volume. |
Product and Packaging Mix
Out of the more than 120116 brands and line extensions of beverages that Coca-Cola FEMSA sells and distributes, itsCoca-Cola FEMSA’s most important brand, Coca-Cola, together with theits line extensions, thereof,Coca-Cola Light,Coca-Cola LifeandCoca-Cola Zero,, accounted for 61.6%61.0% of total sales volume in 2011.2014. Coca-Cola FEMSA’s next largest brands,Ciel(a water brand from Mexico)Mexico and its line extensions),Fanta (and its line extensions),Sprite (and its line extensions) andValleFrut (and its line extensions), accounted for 10.4%11.6%, 5.1%, 2.7%2.8% and 2.2%2.7%, respectively, of total sales volume in 2011.2014. Coca-Cola FEMSA uses the term line extensions to refer to the different flavors in which Coca-Cola FEMSAit offers its brands. Coca-Cola FEMSA produces, markets, sells and distributesCoca-Cola trademark beverages in each of its territories in containers authorized by The Coca-Cola Company, which consist of a variety of returnable and non-returnable presentations in the form of glass bottles, cans and plastic bottles mainly made of polyethylene terephthalate, which we refer to as PET.
Coca-Cola FEMSA uses the term presentation to refer to the packaging unit in which it sells its products. Presentation sizes for Coca-Cola FEMSA’sCoca-Cola trademark beverages range from a 6.5-ounce personal size to a 3-liter multiple serving size. For all of Coca-Cola FEMSA’s products excluding water, itCoca-Cola FEMSA considers a multiple serving size to beas equal to, or larger than, 1.0 liters.liter. In general, personal sizes have a higher price per unit case as compared to multiple serving sizes. Coca-Cola FEMSA offers both returnable and non-returnable
presentations, which allow it to offer portfolio alternatives based on convenience and affordability to implement revenue management strategies and to target specific distribution channels and population segments in its territories. In addition, Coca-Cola FEMSA sells someCoca-Cola trademark beverage syrups in containers designed for soda fountain use, which it referswe refer to as fountain. Coca-Cola FEMSA also sells bottled water products in bulk sizes, which term refersrefer to presentations equal to or larger than 55.0 liters, which have a much lower average price per unit case than Coca-Cola FEMSA’sits other beverage products.
The characteristics of Coca-Cola FEMSA’s territories are very diverse. Central Mexico and Coca-Cola FEMSA’s territories in Argentina are densely populated and have a large number of competing beverage brands as compared to the rest of its territories. Coca-Cola FEMSA’s territories in Brazil are densely populated but have lower per capita consumption of beverage products as compared to Mexico. Portions of southern Mexico, Central America and Colombia are large and mountainous areas with lower population density, lower per capita income and lower per capita consumption of beverages. In Venezuela, Coca-Cola FEMSA faces operational disruptions from time to time, which may have an effect on its volumes sold, and consequently, may result in lower per capita consumption.
The following discussion analyzes Coca-Cola FEMSA’s product and packaging mix by its consolidated reporting segment.segments. The volume data presented areis for the years 2011, 2010,2014, 2013 and 2009.2012.
Mexico and Central America.Coca-Cola FEMSA’s product portfolio consists ofCoca-Cola trademark beverages. In 2008, as part of its efforts to strengthen its multi-category beverage portfolio, Coca-Cola FEMSA incorporatedbeverages, including theJugos del Valle line of juice-based beverages in Mexico, and subsequently in Central America.Per capita consumption of Coca-Cola FEMSA’s beverage products in Mexico and Central America was 632607.5 and 179189.1 eight-ounce servings, respectively, in 2011.2014.
The following table highlights historical sales volume and mix in Mexico and Central America for Coca-Cola FEMSA’s products:
Year Ended December 31, | ||||||||||||
2011 | 2010 | 2009 | ||||||||||
(millions of unit cases) | ||||||||||||
Total Sales Volume(1) | ||||||||||||
Total | 1,510.8 | 1,379.3 | 1,363.0 | |||||||||
% Growth | 9.5 | % | 1.2 | % | 6.3 | % |
(in percentages) | ||||||||||||
Unit Case Volume Mix by Category(1) | ||||||||||||
Sparkling beverages | 74.9 | % | 75.2 | % | 74.7 | % | ||||||
Water(2) | 19.7 | 19.4 | 20.2 | |||||||||
Still beverages | 5.4 | 5.4 | 5.1 | |||||||||
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Total | 100.0 | % | 100.0 | % | 100.0 | % | ||||||
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Year Ended December 31, | ||||||||||||
2014 | 2013(1) | 2012(2) | ||||||||||
Total Sales Volume | ||||||||||||
Total (millions of unit cases) | 1,918.5 | 1,953.6 | 1,871.5 | |||||||||
Growth (%) | (1.8 | ) | 4.4 | 23.9 | ||||||||
(in percentages) | ||||||||||||
Unit Case Volume Mix by Category | ||||||||||||
Sparkling beverages | 73.2 | 73.1 | 73.0 | |||||||||
Water(3) | 21.3 | 21.2 | 21.4 | |||||||||
Still beverages | 5.5 | 5.7 | 5.6 | |||||||||
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Total | 100.0 | 100.0 | 100.0 | |||||||||
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(1) | Includes |
(2) |
(3) | Includes bulk water volumes. |
In 2011,2014, multiple serving presentations represented 67.6%64.5% of total sparkling beverages sales volume in Mexico, remaining flat asa 170 basis points decrease compared to 2010,2013; and 55.7%54.7% of total sparkling beverages sales volume in Central America, a 6016 basis points decrease as compared to 2010.2013. Coca-Cola FEMSA’s strategy is to foster consumption inof single servingserve presentations while maintaining multiple serving volumes. In 2011,2014, returnable packaging, as a percentage of total sparkling beverage sales volume accounted for 31.7%37.9% in Mexico, a 130290 basis points increase as compared to 2010,2013; and 31.7%34.8% in Central America, a 1501,160 basis points decreaseincrease as compared to 2010.2013.
In 2011,2014, Coca-Cola FEMSA’s sparkling beverages decreasedvolume as a percentage of its total sales volume from 75.2% in 2010its Mexico and Central America division increased marginally to 74.9%73.2% as compared with 2013.
Total sales volume in 2011,Coca-Cola FEMSA’s Mexico and Central America division (including Grupo Yoli) reached 1,918.5 million unit cases in 2014, a decrease of 1.8% compared to 1,953.6 million unit cases in 2013. The sales volume for Coca-Cola FEMSA’s sparkling beverage category decreased 1.6%, mainly driven by the impact of price increase to compensate the excise tax to sweetened beverages. Coca-Cola FEMSA’s bottled water portfolio, excluding bulk water, grew 4.2%, mainly driven by the performance of theCiel brand in Mexico. Coca-Cola FEMSA’s still beverage category decreased 5.5% mainly due to the integrationperformance of the beverage divisionsJugos del Valle portfolio in the division. Organically, excluding the non-comparable effect of Grupo TampicoYoli in 2014, total sales volume for Mexico and Central America division reached 1,878.9 million unit cases in 2014, a decrease of 3.8% as compared to 2013. On the same basis, Coca-Cola FEMSA’s sparkling beverage category decreased 3.9%, its bottled water portfolio, excluding bulk water, remained flat, and its still beverage category decreased 7.1%.
In 2013, multiple serving presentations represented 66.2% of total sparkling beverages sales volume in Mexico (including Grupo Fomento Queretano and Grupo CIMSAYoli), a 10 basis points decrease compared to 2012; and 56.3% of total sparkling beverages sales volume in Mexico, which haveCentral America, a higher mix of water in their portfolios.
50 basis points increase compared to 2012. In 2011, Coca-Cola FEMSA’s most popular sparkling beverage presentations in Mexico were the 2.5-liter2013, returnable plastic bottle, the 3.0-liter non-returnable plastic bottle and the 0.6-liter non-returnable plastic bottle (the 20-ounce bottle that is also popular in the United States), which together accounted for 56.8%packaging, as a percentage of total sparkling beverage sales volume, accounted for 35.0% in Mexico.Mexico (including Grupo Fomento Queretano and Grupo Yoli), a 160 basis points increase compared to 2012; and 23.2% in Central America, a 160 basis points decrease compared to 2012.
In 2013, Coca-Cola FEMSA’s sparkling beverages volume as a percentage of total sales volume in its Mexico and Central America division (including Grupo Fomento Queretano and Grupo Yoli) increased marginally to 73.1% as compared with 2012.
Total sales volume in Coca-Cola FEMSA’s Mexico and Central America division (including Grupo Fomento Queretano and Grupo Yoli) reached 1,510.81,953.6 million unit cases in 2011,2013, an increase of 9.5% as4.4% compared to 1,379.31,871.5 million unit cases in 2010.2012. The integration of the beverage divisions of Grupo TampicoFomento Queretano and Grupo CIMSAYoli in Mexico contributed 48.989.3 million unit cases in 2011,2013 of which 63.0% were sparkling beverages 5.2% bottledwere 72.2%, water 27.4%was 9.9%, bulk water was 13.4% and 4.4% still beverages.beverages were 4.5%. Excluding the integration of these territories, volume grew 6.0% in 2011,decreased 0.4% to 1,461.81,864.2 million unit cases. Organically, sparkling beverages sales volume increased 6.0% as compared to 2010, contributing more than 70% of incremental volumes. TheCoca-Cola FEMSA’s bottled water category, including bulk water,portfolio grew 5.6%5.1%, accounting for more than 15%mainly driven by the performance of incremental volumes. ThetheCiel brand in Mexico. On the same basis, Coca-Cola FEMSA’s still beverage category increased 7.5%, representinggrew 3.7% mainly due to the remainderperformance of incremental volumes.the Jugos del Valle portfolio in the division. These increases partially compensated for the flat volumes in sparkling beverages and a 3.5% decline in the bulk water business.
South America (Excluding Venezuela). Coca-Cola FEMSA’s product portfolio in South America consists mainly ofCoca-Cola trademark beverages, and theKaiser beer brands in Brazil, which Coca-Cola FEMSA sells and distributes. In 2008, as part of its efforts to strengthen its multi-category beverage portfolio, Coca-Cola FEMSA incorporatedincluding theJugos del Valle line of juice-based beverages in Colombia. In 2009, this line of beverages was re-launchedColombia and Brazil, and theHeineken beer brands, includingKaiser beer brands, in Brazil, as well. The acquisition of Brisa in 2009 helped Coca-Cola FEMSA to become the leader, as calculated by sales volume, in the water market in Colombia. In 2010, Coca-Cola FEMSA incorporated ready-to-drink beverages under theMatte Leão brand in Brazil. which we sell and distribute.
During 2011,2013, as part of its continuous effort to develop non-carbonated beverages, Coca-Cola FEMSA launchedCepita in non-returnable PET bottles andHi-C, an orangeade, both in Argentina. Beginning in 2009, as part of itsFEMSA’s efforts to foster sparkling beverage per capita consumption in Brazil, Coca-Cola FEMSA re-launched ait reinforced the 2.0-liter returnable plastic bottle for theCoca-Cola brand and introduced two single-serving 0.25-litersingle-serve 0.2 and 0.3 liter presentations. During 2011, these presentations contributed significantly2014, in an effort to incremental volumesincrease sales in Brazil.its still beverage portfolio in the region, Coca-Cola FEMSA reinforced itsJugos del Valle line of business andPowerade brand. Per capita consumption of Coca-Cola FEMSA’s beverages in Colombia, Brazil and Argentina was 129, 261152.7, 244.2 and 395470.4 eight-ounce servings, respectively, in 2011. 2014.
The following table highlights historical total sales volume and sales volume mix in South America (excluding Venezuela), not including beer:
Year Ended December 31, | ||||||||||||
2011 | 2010 | 2009 | ||||||||||
(millions of unit cases) | ||||||||||||
Total Sales Volume | ||||||||||||
Total | 948.1 | 909.2 | 840.4 | |||||||||
% Growth | 4.3 | % | 11.2 | % | 8.4 | % | ||||||
(in percentages) | ||||||||||||
Unit Case Volume Mix by Category | ||||||||||||
Sparkling beverages | 85.9 | % | 85.5 | % | 87.2 | % | ||||||
Water(1) | 9.2 | 10.1 | 8.8 | |||||||||
Still beverages | 4.9 | 4.4 | 4.0 | |||||||||
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Total | 100.0 | % | 100.0 | % | 100.0 | % | ||||||
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Year Ended December 31, | ||||||||||||
2014 | 2013(1) | 2012 | ||||||||||
Total Sales Volume | ||||||||||||
Total (millions of unit cases) | 1,257.7 | 1,028.1 | 967.0 | |||||||||
Growth (%) | 22.6 | 6.3 | 2.0 | |||||||||
(in percentages) | ||||||||||||
Unit Case Volume Mix by Category | ||||||||||||
Sparkling beverages | 84.1 | 84.1 | 84.9 | |||||||||
Water(2) | 9.7 | 10.1 | 10.0 | |||||||||
Still beverages | 6.2 | 5.8 | 5.1 | |||||||||
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Total | 100.0 | 100.0 | 100.0 | |||||||||
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(1) | Includes volume from the operations of Companhia Fluminense from September 2013 and Spaipa from November 2013. |
(2) | Includes bulk water volume. |
Total sales volume was 948.1in Coca-Cola FEMSA’s South America division, excluding Venezuela, increased 22.6% to 1,257.7 million unit cases in 2011, an increase of 4.3%2014 as compared to 909.2 million unit cases2013, as a result of stronger sales volumes in 2010. Growthits recently integrated territories in sparkling beverages,Brazil and better volume performance in Colombia. The still beverage category grew 31.8%, mainly driven by salesthe Jugos del Valle line of business in Colombia and Brazil and the performance ofFUZE tea andLeão tea in the division. Coca-Cola FEMSA’s sparkling portfolio increased 22.6% mainly driven by the performance of theCoca-Cola brand in both Argentina and Colombia, and theFanta andSchweppes brands in Brazil, accounted for the majority of the growth during the year. Growth in still beverages, mainly driven by theJugos del Valle line ofother core products in Brazil and theCepita juice brand andHi-C orangeade in Argentina, represented the balance of incremental volumes. These increases compensated for a decrease in volume inits operations. Coca-Cola FEMSA’s bottled water portfolio, including bulk water, increased 16.9% driven by performance of theBonaqua brand in Argentina and theCrystalbrand in Brazil. Organically, excluding the non-comparable effect of Companhia Fluminense and Spaipa in 2014, total sales volume in South America division excluding Venezuela, increased 3.7% as compared to 2013. On the same basis, Coca-Cola FEMSA’s still beverage category grew 15.3% mainly driven by the reductionJugos del Valle line of business in volumethe region, its bottled water portfolio, including bulk water, increased 6.9% mainly driven by the performance of theBrisaCrystal brand in Colombia.Brazil, and its sparkling beverage category increased 2.5%.
In 2011,2014, returnable packaging, as a percentage of total sparkling beverage sales volume, accounted for: 39.6%for 32.0% in Colombia, a 240decrease of 520 basis points decrease as compared to 2010; 27.8%2013; 19.7% in Argentina, a decrease of 70230 basis points as compared to 2010; and 15.8%15.5% in Brazil a 10050 basis points increase asdecrease compared to 2010.2013. In 2011,2014, multiple serving presentations represented 62.1%69.8%, 71.3%85.3% and 85.0%75.0% of total sparkling beverages sales volume in Colombia, Argentina and Brazil, respectively.
Total sales volume in Coca-Cola FEMSA’s South America division, excluding Venezuela, increased 6.3% to 1,028.1 million unit cases in 2013 as compared to 2012, as a result of growth in Colombia and Argentina and the integration of Companhia Fluminense and Spaipa in its Brazilian territories. These effects compensated for an organic volume decline in Brazil. Organically, excluding the non-comparable effect of Companhia Fluminense and Spaipa, volumes remained flat as compared with the previous year. On the same basis, the still beverage category grew 14.3%, mainly driven by the Jugos del Valle line of business in Colombia and Brazil and the performance ofFUZE tea in the division. Coca-Cola FEMSA’s bottled water portfolio, including bulk water, increased 3.8% mainly driven by theBonaqua brand in Argentina and theBrisa brand in Colombia. These increases compensated for a 1.2% decline in the sparkling beverage portfolio.
In 2013, returnable packaging, as a percentage of total sparkling beverage sales volume, accounted for 37.2% in Colombia, a decrease of 320 basis points as compared to 2012; 22.0% in Argentina, a decrease of 690 basis points and 16.0% in Brazil, excluding the non-comparable effect of Companhia Fluminense and Spaipa, a 170 basis points increase compared to 2012. In 2013, multiple serving presentations represented 66.7%, 85.2% and 72.9% of total sparkling beverages sales volume in Colombia, Argentina and Brazil on an organic basis, respectively.
Coca-Cola FEMSA continues to distribute and sell theHeineken beer portfolio, includingKaiser beer portfoliobrands, in its Brazilian territories through the 20-year term, consistent with the arrangements in place since 2006 with Cervejarias Kaiser, since 2006, prior toa subsidiary of the acquisition of Cervejarias Kaiser by FEMSA Cerveza.Heineken Group. Beginning in the second quarter of 2005, Coca-Cola FEMSA ceased including beer that it distributes in Brazil in its reported sales volumes. On April 30, 2010, the transaction pursuant to which we exchanged 100% of our beer operations for a 20% economic interest in the Heineken Group closed.
Venezuela. Coca-Cola FEMSA’s product portfolio in Venezuela consists ofCoca-Cola trademark beverages. Per capita consumption of Coca-Cola FEMSA’s beverages in Venezuela during 20112014 was 150190.0 eight-ounce servings. At the end of 2011, Coca-Cola FEMSA launchedDel Valle Fresh, an orangeade, in Venezuela, which contributed significantly to incremental volume growth in this country during 2012. During 2014, Coca-Cola FEMSA’s Poweradebrand in the country contributed to its sales growth in the still beverage category.
The following table highlights historical total sales volume and sales volume mix in Venezuela:
Year Ended December 31, | ||||||||||||||||||||||||
2011 | 2010 | 2009 | Year Ended December 31, | |||||||||||||||||||||
(millions of unit cases) | 2014 | 2013 | 2012 | |||||||||||||||||||||
Total Sales Volume | ||||||||||||||||||||||||
Total | 189.8 | 211.0 | 225.2 | |||||||||||||||||||||
% Growth | (10.0 | %) | (6.3 | %) | 9.0 | % | ||||||||||||||||||
Total (millions of unit cases) | 241.1 | 222.9 | 207.7 | |||||||||||||||||||||
Growth (%) | 8.2 | 7.3 | 9.4 | |||||||||||||||||||||
(in percentages) | (in percentages) | |||||||||||||||||||||||
Unit Case Volume Mix by Category | ||||||||||||||||||||||||
Sparkling beverages | 91.7 | % | 91.3 | % | 91.7 | % | 85.7 | 85.6 | 87.9 | |||||||||||||||
Water(1) | 5.4 | 6.5 | 5.7 | 6.5 | 6.9 | 5.6 | ||||||||||||||||||
Still beverages | 2.9 | 2.2 | 2.6 | 7.8 | 7.5 | 6.5 | ||||||||||||||||||
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Total | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | 100.0 | 100.0 | |||||||||||||||
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(1) | Includes bulk water volume. |
Coca-Cola FEMSA has implemented a product portfolio rationalization strategy that allows it to minimize the impact of certain operating disruptions that have been recurrent in Venezuela over the last several years. During 2011,years related to difficulties in accessing raw materials due to the delay in obtaining the corresponding import authorizations. In addition, from time to time, Coca-Cola FEMSA faced a 26-day strike at oneexperiences operating disruptions due to prolonged negotiations of its Venezuelan production and distribution facilities and a difficult economic environment that prevented it from growingcollective bargaining agreements.
Despite these difficulties, total sales volume of its products. As a result, Coca-Cola FEMSA’sincreased 8.2% to 241.1 million unit cases in 2014, as compared to 222.9 million unit cases in 2013. The sales volume in the sparkling beverage volume decreasedcategory grew 8.3%, driven by 9.6%the strong performance of theCoca-Cola brand, which grew 15.3%. The bottled water business, including bulk water, grew 1.6% mainly driven by theNevada brand. The still beverage category increased 10.8%, due to the performance of theDel Valle Fresh orangeade andPoweradebrand.
In 2011,2014, multiple serving presentations represented 78.4%81.9% of total sparkling beverages sales volume in Venezuela, a 100 basis points increase as compared to 2013. In 2014, returnable presentations represented 6.9% of total sparkling beverages sales volume in Venezuela, a 20 basis points increase as compared to 2013.
Total sales volume increased 7.3% to 222.9 million unit cases in 2013, as compared to 207.7 million unit cases in 2012. The sales volume in the sparkling beverage category grew 4.5%, driven by the strong performance of theCoca-Cola brand, which grew 10.0%. The bottled water business, including bulk water, grew 33.2% mainly driven by theNevada brand. The still beverage category increased 23.5%, due to the performance of theDel Valle Fresh orangeade andKapo.
In 2013, multiple serving presentations represented 80.9% of total sparkling beverages sales volume in Venezuela, a 100 basis points increase compared to 2012. In 2013, returnable presentations represented 6.8% of total sparkling beverages sales volume in Venezuela, an 80 basis points increase asdecrease compared to 2010. In 2011, returnable presentations represented 8.0% of total sparkling beverages sales volume in Venezuela, a 40 basis points increase as compared to 2010. Total sales volume was 189.8 million unit cases in 2011, a decrease of 10.0% as compared to 211.0 million unit cases in 2010.2012.
Seasonality
Sales of Coca-Cola FEMSA’s products are seasonal, as its sales levels generally increase during the summer months of each country and during the Christmas holiday season. In Mexico, Central America, Colombia and Venezuela, Coca-Cola FEMSA typically achieves its highest sales during the summer months of April through September as well as during the Christmas holidays in December. In Brazil and Argentina, Coca-Cola FEMSA’s highest sales levels occur during the summer months of October through March and the Christmas holidays in December.
Marketing
Coca-Cola FEMSA, in conjunction with The Coca-Cola Company, has developed a marketing strategy to promote the sale and consumption of Coca-Cola FEMSA’sits products. Coca-Cola FEMSA relies extensively on advertising, sales promotions and retailer support programs to target the particular preferences of its consumers. Coca-Cola FEMSA’s consolidated marketing expenses in 2011,2014, net of contributions by The Coca-Cola Company, were Ps. 4,5083,488 million. The Coca-Cola Company contributed an additional Ps. 2,5614,118 million in 2011,2014, which mainly includes contributions for coolers, bottles and cases. Through the use of advanced IT,information technology, Coca-Cola FEMSA has collected customer and consumer information that allowsallow it to tailor its marketing strategies to target different types of customers located in each of its territories and to meet the specific needs of the various markets it serves.
Retailer Support Programs. Support programs include providing retailers with point-of-sale display materials and consumer sales promotions, such as contests, sweepstakes and the giveaway of product samples.
Coolers. Cooler distributionCoolers play an integral role in Coca-Cola FEMSA’s clients’ plans for success. Increasing both cooler coverage and the number of cooler doors among its retailers is important for the visibility and consumption of Coca-Cola FEMSA’s products and to ensure that theyCoca-Cola FEMSA’s wide variety of products are sold atproperly displayed, while strengthening its merchandising capacity in the proper temperature.traditional sales channel to significantly improve its point-of-sale execution.
Advertising. Coca-Cola FEMSA advertises in all major communications media. ItCoca-Cola FEMSA focuses its advertising efforts on increasing brand recognition by consumers and improving its customer relations. National advertising campaigns are designed and proposed by The Coca-Cola Company’s local affiliates in the countries in which Coca-Cola FEMSA operates, with Coca-Cola FEMSA’s input at the local or regional level. Point-of-sale merchandising and advertising efforts are proposed and implemented by Coca-Cola FEMSA, with a focus on increasing its connection with customers and consumers.
Channel Marketing. In order to provide more dynamic and specialized marketing of its products, Coca-Cola FEMSA’s strategy is to classify its markets and develop targeted efforts for each consumer segment or distribution channel. Coca-Cola FEMSA’s principal channels are small retailers, “on-premise” consumption such as restaurants and bars, supermarkets and third-partythird party distributors. Presence in these channels entails a comprehensive and detailed analysis of the purchasing patterns and preferences of various groups of beverage consumers in each of the different types of locations or distribution channels. In response to this analysis, Coca-Cola FEMSA tailors its product, price, packaging and distribution strategies to meet the particular needs of and exploit the potential of each channel.
Multi-Segmentation. Coca-Cola FEMSA has been implementingimplemented a multi-segmentation strategy in the majorityall of its markets. This strategy consistsThese strategies consist of the implementation of different product/price/package portfolios by market cluster or group. These clusters are defined based on consumption occasion, competitive intensity and socio-economic levels, rather than solely on the types of distribution channels.
Client Value Management. Coca-Cola FEMSA has beencontinues transforming its commercial models to focus on its customers’ value potential using a value-based segmentation approach to capture the industry’s potential. Coca-Cola FEMSA started the rollout of this new model in its Mexico, Central America, Colombia and Brazil operations in 2009 and had covered close to 90% of its total volumes as2009. As of the end of 2011.2014, Coca-Cola FEMSA has covered the totality of the volumes in every operation except for Venezuela (where Coca-Cola FEMSA has partially covered the volumes) and the recently integrated franchises of Companhia Fluminense and Spaipa in Brazil.
Coca-Cola FEMSA believes that the implementation of these strategies described above also enables it to respond to competitive initiatives with channel-specific responses as opposed to market-wide responses. In addition, it allows Coca-Cola FEMSA to be more efficient in the way it goes to market and invests its marketing resources in those segments that could provide a higher return. Coca-Cola FEMSA’s marketing, segmentation and distribution activities are facilitated by its management information systems. Coca-Cola FEMSA has invested significantly in creating these systems, including in hand-held computers to support the gathering of product, consumer and delivery information for most of itsthe sales routes throughout its territories.
Product Sales and Distribution
The following table provides an overview of Coca-Cola FEMSA’s distribution centers and the retailers to which it sellsells its products:
Product Distribution Summary
as of December 31, 2011
As of December 31, 2014 | ||||||||||||||||||||||||
Mexico and Central America(1) | South America(2) | Venezuela | Mexico and Central America(1) | South America(2) | Venezuela | |||||||||||||||||||
Distribution centers | 152 | 65 | 32 | 176 | 66 | 33 | ||||||||||||||||||
Retailers(3) | 863,409 | 663,678 | 209,597 | 955,383 | 814,864 | 181,605 |
(1) | Includes Mexico, Guatemala, Nicaragua, Costa Rica and Panama. |
(2) | Includes Colombia, Brazil and Argentina. |
(3) | Estimated. |
Coca-Cola FEMSA continuously evaluates its distribution model in order to fit with the local dynamics of the marketplace and analyze the way it goes to market, recognizing different service needs from its customers, while looking for a more efficient distribution model. As part of this strategy, Coca-Cola FEMSA is rolling out a variety of new distribution models throughout its territories seekinglooking for improvements in its distribution network.
Coca-Cola FEMSA uses several sales and distribution models depending on market, geographic conditions and the customer’s profile: (1) the pre-sale system, which separates the sales and delivery functions, permitting trucks to be loaded with the mix of products that retailers have previously ordered, thereby increasing both sales and distribution efficiency;efficiency, (2) the conventional truck route system, in which the person in charge of the delivery makes immediate sales from inventory available on the truck;truck, (3) a hybrid distribution system, where the same truck carries product available for immediate sale and product previously ordered through the pre-sale system;system, (4) the telemarketing system, which could be combined with pre-sales visits;visits and (5) sales through third-party wholesalers of Coca-Cola FEMSA’s products.
As part of the pre-sale system, sales personnel also provide merchandising services during retailer visits, which Coca-Cola FEMSA believes enhance the shopper experience at the point of sale. Coca-Cola FEMSA believes that an adequate number of service visits to retailers and frequency of deliveries are essential elements in an effective selling and distribution system for its products.
Coca-Cola FEMSA’s distribution centers range from large warehousing facilities and re-loading centers to small deposit centers. In addition to itsCoca-Cola FEMSA’s fleet of trucks, Coca-Cola FEMSA distributes its products in certain
locations through electric carts and hand-trucks in order to comply with local environmental and traffic regulations. In some of itsCoca-Cola FEMSA’s territories, Coca-Cola FEMSAit retains third parties to transport its finished products from the bottling plants to the distribution centers.
Mexico. Coca-Cola FEMSA contracts with one of our subsidiaries for the transportation of finished products to its distribution centers from its Mexican production facilities. From the distribution centers, Coca-Cola FEMSA then distributes its finished products to retailers through its own fleet of trucks.
In Mexico, Coca-Cola FEMSA sells a majority of its beverages at small retail stores to consumers who may take the beverages for consumption at home or elsewhere. ItCoca-Cola FEMSA also sells products through the “on-premise” consumption segment, supermarkets and other locations. The “on-premise” consumption segment consists of sales through sidewalk stands, restaurants, bars and various types of dispensing machines as well as sales through point-of-sale programs in stadiums, concert halls, auditoriums and theaters.
Brazil.In Brazil, Coca-Cola FEMSA sold 21.1%33% of its total sales volume through supermarketsmodern distribution channels in 2011.2014. Also in Brazil, the delivery ofCoca-Cola FEMSA distributes its finished products to customers is completed byretailers through a combination of its own fleet of trucks and third party distributors, while itCoca-Cola FEMSA maintains control over the selling function. In designated zones in Brazil, third-party distributors purchase Coca-Cola FEMSAits products at a discount from the wholesale price and resell the products to retailers.
Territories other than Mexico and Brazil. Coca-Cola FEMSA distributes its finished products to retailers through a combination of its own fleet of trucks and third-partythird party distributors. In most of itsCoca-Cola FEMSA’s territories, an important part of Coca-Cola FEMSA’sits total sales volume is sold through small retailers, with low supermarket penetration.
Competition
Although Coca-Cola FEMSA believes that its products enjoy wider recognition and greater consumer loyalty than those of its principal competitors, the markets in the territories in which itCoca-Cola FEMSA operates are highly competitive. Coca-Cola FEMSA’s principal competitors are localPepsi bottlers and other bottlers and distributors of national and regional beverage brands. Coca-Cola FEMSA faces increased competition in many of its territories from producers of low-pricelow price beverages, commonly referred to as “B brands.” A number of Coca-Cola FEMSA’s competitors in Central America, Venezuela, Brazil and Argentina offer beer in addition to sparkling beverages, still beverages, and water, which may enable them to achieve distribution efficiencies.
Price discounting and packaging have joined consumer sales promotions, customer service and non-price retailer incentives as the primary means of competition among bottlers. Coca-Cola FEMSA competes by seeking to offer products at an attractive price in the different segments in its markets and by building on the value of its brands. Coca-Cola FEMSA believes that the introduction of new products and new presentations has been a significant competitive technique that allows it to increase demand for its products, provide different options to consumers and increase new consumption opportunities.See “—Sales Overview.Product and Packaging Mix.”
Mexico and Central America. Coca-Cola FEMSA’s principal competitors in Mexico are bottlers ofPepsi products, whose territories overlap but are not co-extensive with Coca-Cola FEMSA’s.its own. Coca-Cola FEMSA competes with Organización Cultiba, S.A.B. de C.V., a joint venture recently formed by Grupo Embotelladores Unidos,Embotelladoras Unidas, S.A.B. de C.V., the formerPepsi bottler in central and southeast Mexico, a subsidiary of PepsiCo, and Empresas Polar, S.A., the leading beer distributor andPepsi bottler in Venezuela. Coca-Cola FEMSA’s main competition in the juice category in Mexico is Grupo Jumex. In the water category,Bonafont, a water brand owned by GroupGrupo Danone, is itsCoca-Cola FEMSA’s main competition. In addition, Coca-Cola FEMSA competes with Cadbury Schweppes in sparkling beverages and with other national and regional brands in its Mexican territories, as well as low-price“B brand” producers, such asBig Cola Ajemex, S.A. de C.V. and Consorcio AGA, S.A. de C.V., whichthat offer various presentations of sparkling and still beverages.
In the countries that comprise Coca-Cola FEMSA’s Central America region, its main competitors arePepsi andBig Cola bottlers. In Guatemala and Nicaragua, itCoca-Cola FEMSA competes with a joint venture between AmBev and The Central American Bottler Corporation. In Costa Rica, Coca-Cola FEMSA’s principal competitor is Florida Bebidas S.A., a subsidiary of Florida Ice and Farm Co. In Panama, itsCoca-Cola FEMSA’s main competitor is Cervecería Nacional, S.A. Coca-Cola FEMSA also faces competition from “B brands” offering multiple-servingmultiple serving size presentations in some Central American countries.
South America (excluding Venezuela). Coca-Cola FEMSA’s principal competitor in Colombia is Postobón, a well-established local bottler that sells flavored sparkling beverages (under the brandsPostobón andColombiana), some of which have a wide consumption preference, such asmanzana Postobón (apple Postobón), which is the second most popular flavor in the Colombian sparkling beverage industry in terms of total sales volume. Postobón also sellsPepsi products. Postobón is a vertically integrated producer, the owners of which hold other significant commercial interests in Colombia. Coca-Cola FEMSA also competes with low-price producers, such as the producers ofBig Cola, which principally offer multiple-servingmultiple serving size presentations in the sparkling and still beverage industry.
In Brazil, Coca-Cola FEMSA competes against AmBev, a Brazilian company with a portfolio of brands that includesPepsi, local brands with flavors such as guaraná, and proprietary beer brands. Coca-Cola FEMSA also competes against “B brands” or “Tubainas,” which are small, local producers of low-cost flavored sparkling beverages in multiple-serving presentations that represent a significant portion of the sparkling beverage market.
In Argentina, Coca-Cola FEMSA’s main competitor is Buenos Aires Embotellador S.A. (BAESA), or BAESA, aPepsi bottler, which is owned by Argentina’s principal brewery, Quilmes Industrial S.A., and is indirectly controlled by AmBev. In addition, Coca-Cola FEMSA competes with a number of competitors offering generic, low-priced sparkling beverages as well as many other generic products and private label proprietary supermarket brands.
Venezuela.Venezuela. In Venezuela, Coca-Cola FEMSA’s main competitor is Pepsi-Cola Venezuela, C.A., a joint venture formed between PepsiCo and Empresas Polar, S.A., the leading beer distributor in the country. Coca-Cola FEMSA also competes with the producers ofBig Cola in part of thethis country.
Raw Materials
Pursuant to Coca-Cola FEMSA’sits bottler agreements, itCoca-Cola FEMSA is authorized to manufacture, sell and distributeCoca-Cola trademark beverages within specific geographic areas, and Coca-Cola FEMSA is required to purchase in someall of its territories for allCoca-Cola trademark beverages concentrate from companies designated by The Coca-Cola Company and artificial sweeteners from companies authorized by The Coca-Cola Company. Concentrate prices for sparklingCoca-Cola trademark beverages are determined as a percentage of the weighted average retail price in local currency net of applicable taxes. Although The Coca-Cola Company has the right to unilaterally set the price of concentrates, in practice this percentage has historically been set pursuant to periodic negotiations with The Coca-Cola Company.
In 2005,the past, The Coca-Cola Company decided tohas increased concentrate prices forCoca-Cola trademark beverages in some of the countries in which Coca-Cola FEMSA operates. In 2014, The Coca-Cola Company informed Coca-Cola FEMSA that it will gradually increase concentrate prices for sparklingcertainCoca-Cola trademark beverages over a five year period in BrazilCosta Rica and Mexico. ThesePanama beginning in 2014. Based on Coca-Cola FEMSA’s estimates, it currently does not expect these increases were fully implemented in Brazil in 2008 andto have a material adverse effect on its results of operation. Most recently, The Coca-Cola Company also informed Coca-Cola FEMSA that it will gradually increase concentrate prices for flavored water over a four year period in Mexico beginning in 2009. As part ofApril 2015. The Coca-Cola Company may unilaterally increase concentrate prices again in the cooperation framework thatfuture and Coca-Cola FEMSA reachedmay not be successful in negotiating or implementing measures to mitigate the negative effect this may have in the prices of its products or its results.See “Item 10. Additional Information—Material Contracts—Material Contracts Relating to Coca-Cola FEMSA—Cooperation Framework with The Coca-Cola Company at the end of 2006, The Coca-Cola Company will provide a relevant portion of the funds derived from the concentrate increase for marketing support of Coca-Cola FEMSA’s sparkling and still beverages portfolio. See “Item 7. Major Shareholders and Related Party Transactions—Related Party Transactions—Business Transactions between Coca-Cola FEMSA and The Coca-Cola Company.”
In addition to concentrate, Coca-Cola FEMSA purchases sweeteners, carbon dioxide, (CO2), resin and ingotspreforms to make plastic bottles, finished plastic and glass bottles, cans, caps and fountain containers, as well as other packaging materials and raw materials. Sweeteners are combined with water to produce basic syrup, which is added to the concentrate as the sweetener for most of Coca-Cola FEMSA’s beverages. Coca-Cola FEMSA’s bottler agreements provide that, with respect toCoca-Colatrademark beverages, these materials may be purchased only from suppliers approved by The Coca-Cola Company, including affiliatescertain of ours.our affiliates. Prices for packaging materials and HFCS historically have been determined with reference to the U.S. dollar, although the local currency equivalent in a particular country is subject to price volatility in accordance with changes in exchange rates. Coca-Cola FEMSA’s most significant packaging raw material costs arise from the purchase of resin, plastic ingotspreforms to make plastic bottles and finished plastic bottles, which Coca-Cola FEMSA obtains from international and local producers. The prices of these materials are tiedrelated to crude oil prices and global resin supply. In recent years Coca-Cola FEMSA has experienced volatility in the prices it payswe pay for these materials. Across its territories, Coca-Cola FEMSA’s average price for resin in U.S. dollars increased approximately 30%decreased 4.6% in 20112014 as compared to 2010.2013.
Under Coca-Cola FEMSA’s agreements with The Coca-Cola Company, it may use raw or refined sugar or HFCS as sweeteners in its products. Sugar prices in all of the countries in which Coca-Cola FEMSA operates, other than Brazil, are subject to local regulations and other barriers to market entry that cause Coca-Cola FEMSA to pay in excess of international market prices for sugar in certain countries. In recent years, international sugar prices have experienced significant volatility. Across Coca-Cola FEMSA’s territories, its average price for sugar in U.S. dollars decreased approximately 1.7% in 2014 as compared to 2013.
Coca-Cola FEMSA categorizes water as a raw material in its business. Coca-Cola FEMSA obtains water for the production of some of its natural spring water products, such asManantialin Colombia andCrystal in Brazil, from spring water pursuant to concessions granted.
None of the materials or supplies that Coca-Cola FEMSA uses areis presently in short supply, although the supply of specific materials could be adversely affected by strikes, weather conditions, governmental controls, or national emergency situations.situations, water shortages or the failure to maintain its existing water concessions.
Mexico and Central America. In Mexico, Coca-Cola FEMSA purchases its returnable plastic bottles from Graham Packaging México, S.A. de C.V., known as Graham, which is the exclusive supplier of returnable plastic bottles tofor The Coca-Cola Company and its bottlers in Mexico. Coca-Cola FEMSA mainly purchases resin from Indorama Ventures Polymers México, S. de R.L. de C.V. (formerly Arteva Specialties, S. de R.L. de C.V.), M. & G. Polímeros México, S.A. de C.V. and DAK Resinas Americas Mexico, S.A. de C.V., which ALPLAAlpla México, S.A. de C.V., known as ALPLA,Alpla, and Envases InnovativosUniversales de México, S.A.S.A.P.I. de C.V. manufacture into non-returnable plastic bottles for Coca-Cola FEMSA.
Coca-Cola FEMSA purchases all of its cans from Fábricas de Monterrey, S.A. de C.V. and Envases Universales de México, S.A.P.I. de C.V., through Promotora Mexicana de Embotelladoras, S.A. de C.V., known as PROMESA, a cooperative ofCoca-Cola bottlers, in which, as of April 20, 2012,10, 2015, Coca-Cola FEMSA held a 25.0%35.0% equity interest. Coca-Cola FEMSA mainly purchases its glass bottles from EXCO Integral Services, S.A. de C.V. (formerly Compañía Vidriera, S.A. de C.V.), known as VITRO,FEVISA Industrial, S.A. de C.V., and Glass & Silice, S.A. de C.V. (formerly Vidriera de Chihuahua, S.A. de C.V., or VICHISA), a wholly-owned subsidiary of Cuauhtémoc Moctezuma (formerly FEMSA Cerveza), which currently is a wholly-owned subsidiary of the Heineken Group.
Coca-Cola FEMSA purchases sugar from, among other suppliers, PiasaPIASA and Beta San Miguel, S.A. de C.V., both sugar cane producers in which, as of April 20, 2012,10, 2015, Coca-Cola FEMSA held approximately 13.2%a 36.3% and 2.5%2.7% equity interests,interest, respectively. Coca-Cola FEMSA purchases HFCS from CP Ingredientes,Ingredion México, S.A. de C.V., Almidones Mexicanos, S.A. de C.V. and Almidones Mexicanos,Cargill de México, S.A. de C.V., known as Almex.
Imported sugar isSugar prices in Mexico are subject to import duties,local regulations and other barriers to market entry that cause Coca-Cola FEMSA to pay higher prices than those paid in the amount of which is set by the Mexican government.international market. As a result, prices in Mexico have no correlation to international market prices. In 2014, sugar prices in Mexico are in excess of international market prices for sugar, and in 2011, were 47% higher on average in Mexico. In 2011, sugar prices increaseddecreased approximately 29%7.0% as compared to 2010.2013.
In Central America, the majority of Coca-Cola FEMSA’s raw materials such as glass and plastic bottles are purchased from several local suppliers. Coca-Cola FEMSA purchases all of its cans from PROMESA. Sugar is available from suppliers that represent several local producers. Local sugar prices in the countries that comprise the region have increased, mainly due to volatility in international prices. In Costa Rica, Coca-Cola FEMSA acquires plastic non-returnable bottles from ALPLAAlpla C.R. S.A., and in Nicaragua itCoca-Cola FEMSA acquires such plastic bottles from ALPLAAlpla Nicaragua, S.A.
South America (excluding Venezuela). In Colombia, Coca-Cola FEMSA uses sugar as a sweetener in most of its products, andwhich it buys such sugar from several domestic sources. During 2011, Coca-Cola FEMSA started to use HFCS as an alternative sweetener for its products. Coca-Cola FEMSA purchases HFCS from Archer Daniels Midland Company. It purchases plastic bottles from Amcor Rigid Plastics de Colombia, S.A. and Tapón Corona de Colombia S.A. It purchasesCoca-Cola FEMSA has historically purchased all of its glass bottles from Peldar O-IO-I; however, it has engaged new suppliers and has recently acquired glass bottles from Al Tajir and Frigoglass in both cases from the United Arab Emirates. Coca-Cola FEMSA purchases all of its cans from Crown both suppliers inColombiana, S.A., which are only available through this local supplier. Grupo Ardila Lulle, owners of Coca-Cola FEMSA’s competitor Postobón, ownsown a minority equity interest. Glass bottlesinterest in Peldar O-I and cans are available only from these local sources.Crown Colombiana, S.A.
Sugar is available in Brazil at local market prices, which historically have been similar to international prices. Sugar prices in Brazil in recent periods have been volatile, mainly due to the increased demand for sugar cane for production of alternative fuels, and Coca-Cola FEMSA’s average acquisition cost for sugar in 2011 increaseddecreased approximately 30%4.1% as compared to 2010.2013.See “Item 11. Quantitative and Qualitative Disclosures about Market Risk—Commodity Price Risk.” Coca-Cola FEMSA purchases glass bottles, plastic bottles and cans from several domestic and international suppliers.
In Argentina, Coca-Cola FEMSA mainly uses HFCS that it purchases from several different local suppliers as a sweetener in its products, instead of sugar.products. Coca-Cola FEMSA purchases glass bottles, plastic cases and other raw materials from several domestic sources. ItCoca-Cola FEMSA purchases pre-formed plastic ingots,preforms, as well as returnable plastic bottles, at competitive prices from Embotelladora del AtlánticoAndina Empaques S.A., a local subsidiary of Embotelladora Andina S.A., aCoca-Cola bottler with operations in Chile, Argentina, ChileBrazil and Brazil,Paraguay, and other local suppliers. Coca-Cola FEMSA also acquires pre-formed plastic ingotspreforms from ALPLAAlpla Avellaneda, S.A. and other suppliers. Coca-Cola FEMSA produces its own can presentations, aseptic packaging and hot filled products for distribution of its products to its customers in Buenos Aires.
Venezuela. In Venezuela, Coca-Cola FEMSA uses sugar as a sweetener in allmost of its products, and purchases such sugarwhich it purchase mainly from the local market. Since 2003, from time to time, Coca-Cola FEMSA has experienced a sugar shortage due to lower domestic production and the inability of the predominant sugar importers to obtain permission to import in a timely manner. While sugar distribution to the food and beverages industry and to retailers is controlled by the government, Coca-Cola FEMSA did not experience any disruptions during 20112014 with respect to access to sufficient sugar supply.
However, we cannot assure you that Coca-Cola FEMSA will not experience disruptions in its ability to meet its sugar requirements in the future should the Venezuelan government impose restrictive measures in the future.measures. Coca-Cola FEMSA buys glass bottles from one local supplier, Productos de Vidrio, S.A., but there are alternative suppliersthe only supplier authorized by The Coca-Cola Company. Coca-Cola FEMSA acquires most of its plastic non-returnable bottles from ALPLAAlpla de Venezuela, S.A. and allmost of its aluminum cans from a local producer, Dominguez Continental, C.A.
Under current regulations promulgated by the Venezuelan authorities, Coca-Cola FEMSA’s ability and that of its suppliers to import some of itsthe raw materials and other supplies used in its production could be limited, and access to the official exchange rate for these items, for Coca-Cola FEMSA and its suppliers, including, among other items,others, concentrate, resin, aluminum, plastic caps, distribution trucks and vehicles is only achieved by obtaining proper approvals from the relevant authorities.
Overview and FacilitiesBackground
OverFEMSA Comercio operates the largest chain of small-format stores in Mexico, measured in terms of number of stores as of December 31, 2014, mainly under the trade name OXXO. As of December 31, 2014, FEMSA Comercio operated 12,853 OXXO stores, of which 12,812 are located throughout the country, with a particularly strong presence in the northern part of Mexico, and the remaining 41 stores are located in Bogotá, Colombia.
FEMSA Comercio was established by FEMSA in 1978 when two OXXO stores were opened in Monterrey, one store in Mexico City and another store in Guadalajara. The motivating factor behind FEMSA’s entrance into the retail industry was to enhance beer sales through company-owned retail outlets as well as to gather information on customer preferences. In 2014, a typical OXXO store carried 2,744 different store keeping units (SKUs) in 31 main product categories.
In recent years, FEMSA Comercio has represented an effective distribution channel for our beverage products, as well as a rapidly growing point of contact with our consumers. Based on the belief that location plays a major role in the long-term success of a retail operation such as a small-format store, as well as a role in our continually improving ability to accelerate and streamline the new-store development process, FEMSA Comercio has focused on a strategy of rapid, profitable growth. FEMSA Comercio opened 1,040, 1,120 and 1,132 net new OXXO stores in 2012, 2013 and 2014, respectively. The accelerated expansion in the number of OXXO stores yielded total revenue growth of 12.4% to reach Ps. 109,624 million in 2014. OXXO same-store sales increased an average of 2.7%, driven by an increased average customer ticket without any change in same-store traffic. FEMSA Comercio performed approximately 3.4 billion transactions in 2014 compared to 3.2 billion transactions in 2013.
Business Strategy
A fundamental element of FEMSA Comercio’s business strategy is to utilize its position in the small-format store market to grow in a cost-effective and profitable manner. As a market leader in small-format store retailing, based on internal company surveys, management believes that FEMSA Comercio has an in-depth understanding of its markets and significant expertise in operating a national store chain. FEMSA Comercio intends to continue increasing its store base while capitalizing on the market knowledge gained at existing stores.
FEMSA Comercio has developed proprietary models to assist in identifying appropriate store locations, store formats and product categories. Its model utilizes location-specific demographic data and FEMSA Comercio’s experience in similar locations to fine tune the store format and product offerings to the target market. Market segmentation is becoming an important strategic tool, and it should increasingly allow FEMSA Comercio to improve the operating efficiency of each location and the overall profitability of the chain.
FEMSA Comercio has made and will continue to make significant investments in IT to improve its ability to capture customer information from its existing OXXO stores and to improve its overall operating performance. The majority of products carried through OXXO stores are bar-coded, and all OXXO stores are equipped with point-of-sale systems that are integrated into a company-wide computer network. To implement revenue management strategies, FEMSA Comercio created a division in charge of product category management for products, such as beverages, fast food and perishables, to enhance and better utilize its consumer information base and market intelligence capabilities.
FEMSA Comercio utilizes a technology platform supported by an enterprise resource planning (ERP) system, as well as other technological solutions such as merchandising and point-of-sale systems, which will allow FEMSA Comercio to continue redesigning its key operating processes and enhance the usefulness of its market information going forward. In addition, FEMSA Comercio has expanded its operations by opening 3 new OXXO stores in Bogotá, Colombia in 2014.
FEMSA Comercio has adopted innovative promotional strategies in order to increase store traffic and sales. In particular, FEMSA Comercio sells high-frequency items such as beverages, snacks and cigarettes at competitive prices. FEMSA Comercio’s ability to implement this strategy profitably is partly attributable to the size of the OXXO stores chain, as FEMSA Comercio is able to work together with its suppliers to implement their revenue-management strategies through differentiated promotions. OXXO stores’ national and local marketing and promotional strategies are an effective revenue driver and a means of reaching new segments of the population while strengthening the OXXO brand. For example, the organization has refined its expertise in executing cross promotions (discounts on multi-packs or sales of complementary products at a special price) and targeted promotions to attract new customer segments, such as housewives, by expanding the offerings in the grocery product category in certain stores. FEMSA Comercio is also strengthening its capabilities to increasingly provide consumers with services such as utility bill payment and other basic transactions.
Store Locations
With 12,812 OXXO stores in Mexico and 41 OXXO stores in Colombia as of December 31, 2014, FEMSA Comercio operates the largest small-format store chain in Latin America measured by number of stores. OXXO stores are concentrated in the northern part of Mexico, but also have a growing presence in the rest of the country.
OXXO Stores
Regional Allocation in Mexico and Latin America(*)
as of December 31, 2014
FEMSA Comercio has aggressively expanded its number of OXXO stores over the past several years. The average investment required to open a new OXXO store varies, depending on location and format and whether the store is opened in an existing retail location or requires construction of a new store. FEMSA Comercio is generally able to use supplier credit to fund the initial inventory of new OXXO stores.
OXXO Stores
Total Growth
Year Ended December 31, | ||||||||||||||||||||
2014 | 2013 | 2012 | 2011 | 2010 | ||||||||||||||||
Total OXXO stores | 12,853 | 11,721 | 10,601 | 9,561 | 8,426 | |||||||||||||||
Store growth (% change over previous year) | 9.7 | % | 10.6 | % | 10.9 | % | 13.5 | % | 14.9 | % |
FEMSA Comercio currently expects to continue the OXXO stores growth trend established over the past several years Coca-Colaby emphasizing growth in areas of high economic potential in existing markets and by expanding in underserved and unexploited markets. Management believes that the southeast part of Mexico is particularly underserved by the small-format store industry.
The identification of locations and pre-opening planning in order to optimize the results of new OXXO stores are important elements in FEMSA made significant capital investmentsComercio’s growth plan. FEMSA Comercio continuously reviews store performance against certain operating and financial benchmarks to modernizeoptimize the overall performance of the chain. OXXO stores unable to maintain benchmark standards are generally closed. Between December 31, 2010 and 2014, the total number of OXXO stores increased by 4,427, which resulted from the opening of 4,573 new stores and the closing of 146 existing stores.
Competition
FEMSA Comercio, mainly through OXXO stores, competes in the overall retail market, which we believe is highly competitive. OXXO stores face competition from small-format stores like 7-Eleven, Super Extra, Super City, Círculo K stores and other numerous chains of retailers across Mexico, from other regional small-format retailers to small informal neighborhood stores. OXXO competes both for consumers and for new locations for stores and the managers to operate those stores. FEMSA Comercio operates in the 32 Mexican states and has much broader geographical coverage than any of its facilitiescompetitors in Mexico.
Market and improve operating efficiencyStore Characteristics
Market Characteristics
FEMSA Comercio is placing increased emphasis on market segmentation and productivity, including:differentiation of store formats to more appropriately serve the needs of customers on a location-by-location basis. The principal segments include residential neighborhoods, commercial and office locations and stores near schools and universities, along with other types of specialized locations.
Approximately 64.3% of OXXO stores’ customers are between the ages of 15 and 35. FEMSA Comercio also segments the market according to demographic criteria, including income level.
OXXO Store Characteristics
The average size of an OXXO store is approximately 104 square meters of selling space, excluding space dedicated to refrigeration, storage or parking. The average constructed area of a store is approximately 187 square meters and, when parking areas are included, the average store size is approximately 421 square meters.
FEMSA Comercio—Operating Indicators
Year Ended December 31, | ||||||||||||||||||||
2014 | 2013 | 2012 | 2011 | 2010 | ||||||||||||||||
(percentage increase compared to previous year) | ||||||||||||||||||||
Total FEMSA Comercio revenues | 12.4 | % | 12.9 | % | 16.6 | % | 19.0 | % | 16.3 | % | ||||||||||
OXXO same-store sales(1) | 2.7 | % | 2.4 | % | 7.7 | % | 9.2 | % | 5.2 | % |
increasing
(1) | Same-store sales growth is calculated by comparing the sales of stores for each year that have been in operation for more than 12 months with the sales of those same stores during the previous year. |
Beer, cigarettes, soft drinks and other beverages and snacks represent the annual capacitymain product categories for OXXO stores. FEMSA Comercio has a distribution agreement with Cuauhtémoc Moctezuma (which is now part of the Heineken Group). As a result of this agreement, OXXO stores only carry beer brands produced and distributed by Cuauhtémoc Moctezuma. OXXO stores will continue to benefit from the existing relationship under which Cuauhtémoc Moctezuma will continue to be the exclusive supplier of beer to OXXO until June 2020.
Approximately 59% of OXXO stores are operated by independent managers responsible for all aspects of store operations. The managers are commission agents and are not employees of FEMSA Comercio. Each store manager is the legal employer of the store’s staff, which typically numbers six people per store. FEMSA Comercio continually invests in on-site operating personnel, with the objective of promoting loyalty, customer service and low personnel turnover in the stores.
Advertising and Promotion
FEMSA Comercio’s marketing efforts for OXXO stores include both specific product promotions and image advertising campaigns. These strategies seek to increase store traffic and sales, and to reinforce the OXXO name and market position.
FEMSA Comercio manages its bottling plantsadvertising for OXXO stores on three levels depending on the nature and scope of the specific campaign: local or store-specific, regional and national. Store-specific and regional campaigns are closely monitored to ensure consistency with the overall corporate image of OXXO stores and to avoid conflicts with national campaigns. FEMSA Comercio primarily uses point of purchase materials, flyers, handbills and print and radio media for promotional campaigns, although television is used occasionally for the introduction of new products and services. The OXXO store chain’s image and brand name are presented consistently across all stores, irrespective of location.
Inventory and Purchasing
FEMSA Comercio has placed considerable emphasis on improving operating performance. As part of these efforts, FEMSA Comercio continues to invest in extensive information management systems to improve inventory management. Electronic data collection has enabled FEMSA Comercio to reduce average inventory levels. Inventory replenishment decisions are carried out on a store-by-store basis.
Management believes that the OXXO store chain’s scale of operations provides FEMSA Comercio with a competitive advantage in its ability to realize strategic alliances with suppliers. General category offerings are determined on a national level, although purchasing decisions are implemented on a local, regional or national level, depending on the nature of the product category. Given the fragmented nature of the retail industry in Mexico in general, Mexican producers of beer, soft drinks, bread, dairy products, snacks, cigarettes and other high-frequency products have established proprietary distribution systems with extensive direct distribution routes. As a result, approximately 53% of the OXXO store chain’s total sales consist of products that are delivered directly to the stores by installingsuppliers. Other products with longer shelf lives are distributed to stores by FEMSA Comercio’s distribution system, which includes 16 regional warehouses located in Monterrey, Guadalajara, Mexicali, Mérida, León, Obregón, Puebla, Queretaro, Chihuahua, Reynosa, Saltillo, Tijuana, Toluca, Villahermosa and two in Mexico City. The distribution centers operate a fleet of approximately 792 trucks that make deliveries to each store approximately twice per week.
Seasonality
OXXO stores experience periods of high demand in December, as a result of the holidays, and in July and August, as a result of increased consumption of beer and soft drinks during the hot summer months. The months of November and February are generally the weakest sales months for OXXO stores. In general, colder weather during these months reduces store traffic and consumption of cold beverages.
Entry into Drugstore Market
During 2013, FEMSA Comercio entered the drugstore market in Mexico through two transactions. FEMSA Comercio through CCF, closed the acquisition of Farmacias YZA, a leading drugstore operator in Southeast Mexico, headquartered in Merida, Yucatan. The founding shareholders of Farmacias YZA hold a 25% stake in CCF. Following this transaction, on May 13, 2013, CCF acquired Farmacias Moderna, a leading drugstore operator in the western state of Sinaloa.
In December 2014, FEMSA Comercio through CCF agreed to acquire 100% of Farmacias Farmacón, a a regional pharmacy chain consisting of 213 stores in the northwestern Mexican states of Sinaloa, Sonora, Baja California and Baja California Sur. With this transaction, FEMSA Comercio will reach a total of approximately 803 pharmacy stores. The transaction is pending customary regulatory approvals, and is expected to close during the second quarter of 2015.
The rationale for entering this new production lines;
installing clarification facilitiesmarket is anchored on our belief that FEMSA Comercio has developed certain capabilities and skills that should be applicable and useful in the operation of other small retail formats. These capabilities include site selection, logistics, business processes, human resources, inventory and supplier management. The drugstore market in Mexico is very fragmented and FEMSA Comercio believes it is well equipped to processcreate value by entering this market and pursuing a growth strategy that maximizes the opportunity.
Entry into Quick Service Restaurant Market
Following the same rationale that its capabilities and skills are well suited to different types of sweeteners;
installing plastic bottle-blowing equipment;
modifying equipmentsmall-format retail, during 2013 FEMSA Comercio also entered the quick service restaurant market in Mexico through the 80% acquisition of Doña Tota. This is a leading regional chain specializing in Mexican food with a particularly strong presence in the northeast of the country. This acquisition presented FEMSA Comercio with the opportunity to increase flexibility to produce different presentations, including faster sanitationgrow Doña Tota’s stand-alone store base across the country, while also offering the benefit of advancing FEMSA Comercio’s prepared food capabilities and changeover times on production lines;expertise.
Gas Station Market
Since 1995, FEMSA Comercio has been providing services and
closing obsolete production facilities.
assets for the operation of gasoline service stations through agreements with third parties that own Petroleos Mexicanos (PEMEX) franchises, using the commercial brand OXXO Gas. As of December 31, 2011, Coca-Cola2014 there were 227 OXXO Gas stations, most of them adjacent to OXXO stores.
Mexican legislation has historically precluded FEMSA owned 35 bottling plants company-wide. By country, itComercio from participating in the retail sale of gasoline and therefore precluded ownership of PEMEX franchises, given our foreign institutional investor base. In response to recent changes in this legislation, FEMSA Comercio has fourteen bottling facilitiesagreed to acquire the related PEMEX franchises from the aforementioned third parties and plans to lease, acquire or open more gasoline service stations in Mexico, fivethe future.
Other Stores
FEMSA Comercio also operates other small-format stores, which include soft discount stores with a focus on perishables and liquor stores.
Equity Investment in Central America, six in Colombia, four in Venezuela, four in Brazil and two in Argentina.the Heineken Group
As of December 31, 2011,2014, FEMSA owned a non-controlling interest in the Heineken Group, one of the world’s leading brewers. As of December 31, 2014, our 20% economic interest in the Heineken Group was comprised of 43,018,320 shares of Heineken Holding N.V. and 72,182,203 shares of Heineken N.V. For 2014, FEMSA recognized equity income of Ps. 5,244 million regarding its 20% economic interest in the Heineken Group; see Note 10 to our audited consolidated financial statements.
As described above, FEMSA Comercio has a distribution agreement with Cuauhtémoc Moctezuma (which is now a part of the Heineken Group) pursuant to which OXXO stores only carry beer brands produced and distributed by Cuauhtémoc Moctezuma. OXXO stores will continue to benefit from the existing relationship under which Cuauhtémoc Moctezuma will continue to be the exclusive supplier of beer to OXXO until June 2020. As of April 30, 2010, Coca-Cola FEMSA operated 249 distribution centers, approximately 51%has agreed with Cervejarias Kaiser (also now part of the Heineken Group) to continue to distribute and sell the Kaiser beer portfolio in Coca-Cola FEMSA’s Brazilian territories for a 20-year term beginning in 2003, consistent with the arrangement already in place. In addition, our logistic services subsidiary provides certain services to Cuauhtémoc Moctezuma and its subsidiaries.
Our other business consists of the following smaller operations that support our core operations:
Our logistics services subsidiary provides a broad range of logistics and vehicle maintenance services to Coca-Cola FEMSA, FEMSA Comercio and third-party clients in the beverages, consumer products and retail industries. It has operations in Mexico, Brazil, Colombia, Panama, Costa Rica, Nicaragua and Perú.
Our refrigeration business produces vertical and horizontal commercial refrigerators for the soft drink, beer and food industries, with an annual capacity of 535,800 units at December 31, 2014. In 2014, this business sold 418,064 refrigeration units, 30% of which were in its Mexican territories.sold to Coca-Cola FEMSA, and the remainder of which were sold to third parties.
Our corporate services subsidiary employs our corporate staff, including the personnel managing the areas of finance, corporate accounting, taxation, legal, financial and strategic planning, human resources, corporate affairs and internal audit. Through this subsidiary, we direct, control, supervise and review the operations of our sub-holding companies. As of December 31, 2014, FEMSA Comercio and our other business subsidiaries pay management fees for the services provided to them. In addition, Coca-Cola FEMSA has entered into a services agreement pursuant to which it pays for specific services.
Description of Property, Plant and Equipment
As of December 31, 2014, we owned all of our manufacturing facilities and substantially all of our warehouses and distribution centers. Our properties primarily consisted of production and distribution facilities for our soft drink operations and office space. In addition, FEMSA Comercio owns more than 86%approximately 11.2% of these distribution centers and leases the remainder. See “Item 4. Information onOXXO store locations, while the Company—Coca-Cola FEMSA—Product Sales and Distribution.”other stores are located in properties that are rented under long-term lease arrangements with third parties.
The table below summarizes by country the installed capacity and percentage utilization of Coca-Cola FEMSA’s production facilities:
Bottling Facility SummaryMarket and Store Characteristics
AsMarket Characteristics
FEMSA Comercio is placing increased emphasis on market segmentation and differentiation of December 31, 2011store formats to more appropriately serve the needs of customers on a location-by-location basis. The principal segments include residential neighborhoods, commercial and office locations and stores near schools and universities, along with other types of specialized locations.
Approximately 64.3% of OXXO stores’ customers are between the ages of 15 and 35. FEMSA Comercio also segments the market according to demographic criteria, including income level.
OXXO Store Characteristics
The average size of an OXXO store is approximately 104 square meters of selling space, excluding space dedicated to refrigeration, storage or parking. The average constructed area of a store is approximately 187 square meters and, when parking areas are included, the average store size is approximately 421 square meters.
FEMSA Comercio—Operating Indicators
Country | Installed Capacity (thousands of unit cases) | % Utilization(1) | ||||||
Mexico | 1,897,760 | 70 | % | |||||
Guatemala | 34,544 | 80 | % | |||||
Nicaragua | 65,475 | 58 | % | |||||
Costa Rica | 84,238 | 54 | % | |||||
Panama | 40,754 | 64 | % | |||||
Colombia | 531,046 | 47 | % | |||||
Venezuela | 296,052 | 63 | % | |||||
Brazil | 650,356 | 68 | % | |||||
Argentina | 316,040 | 66 | % |
Year Ended December 31, | ||||||||||||||||||||
2014 | 2013 | 2012 | 2011 | 2010 | ||||||||||||||||
(percentage increase compared to previous year) | ||||||||||||||||||||
Total FEMSA Comercio revenues | 12.4 | % | 12.9 | % | 16.6 | % | 19.0 | % | 16.3 | % | ||||||||||
OXXO same-store sales(1) | 2.7 | % | 2.4 | % | 7.7 | % | 9.2 | % | 5.2 | % |
(1) |
Beer, cigarettes, soft drinks and other beverages and snacks represent the main product categories for OXXO stores. FEMSA Comercio has a distribution agreement with Cuauhtémoc Moctezuma (which is now part of the Heineken Group). As a result of this agreement, OXXO stores only carry beer brands produced and distributed by Cuauhtémoc Moctezuma. OXXO stores will continue to benefit from the existing relationship under which Cuauhtémoc Moctezuma will continue to be the exclusive supplier of beer to OXXO until June 2020.
Approximately 59% of OXXO stores are operated by independent managers responsible for all aspects of store operations. The managers are commission agents and are not employees of FEMSA Comercio. Each store manager is the legal employer of the store’s staff, which typically numbers six people per store. FEMSA Comercio continually invests in on-site operating personnel, with the objective of promoting loyalty, customer service and low personnel turnover in the stores.
Advertising and Promotion
OverviewFEMSA Comercio’s marketing efforts for OXXO stores include both specific product promotions and Backgroundimage advertising campaigns. These strategies seek to increase store traffic and sales, and to reinforce the OXXO name and market position.
FEMSA Comercio manages its advertising for OXXO stores on three levels depending on the nature and scope of the specific campaign: local or store-specific, regional and national. Store-specific and regional campaigns are closely monitored to ensure consistency with the overall corporate image of OXXO stores and to avoid conflicts with national campaigns. FEMSA Comercio primarily uses point of purchase materials, flyers, handbills and print and radio media for promotional campaigns, although television is used occasionally for the introduction of new products and services. The OXXO store chain’s image and brand name are presented consistently across all stores, irrespective of location.
Inventory and Purchasing
FEMSA Comercio operateshas placed considerable emphasis on improving operating performance. As part of these efforts, FEMSA Comercio continues to invest in extensive information management systems to improve inventory management. Electronic data collection has enabled FEMSA Comercio to reduce average inventory levels. Inventory replenishment decisions are carried out on a store-by-store basis.
Management believes that the largestOXXO store chain’s scale of operations provides FEMSA Comercio with a competitive advantage in its ability to realize strategic alliances with suppliers. General category offerings are determined on a national level, although purchasing decisions are implemented on a local, regional or national level, depending on the nature of the product category. Given the fragmented nature of the retail industry in Mexico in general, Mexican producers of beer, soft drinks, bread, dairy products, snacks, cigarettes and other high-frequency products have established proprietary distribution systems with extensive direct distribution routes. As a result, approximately 53% of the OXXO store chain’s total sales consist of products that are delivered directly to the stores by suppliers. Other products with longer shelf lives are distributed to stores by FEMSA Comercio’s distribution system, which includes 16 regional warehouses located in Monterrey, Guadalajara, Mexicali, Mérida, León, Obregón, Puebla, Queretaro, Chihuahua, Reynosa, Saltillo, Tijuana, Toluca, Villahermosa and two in Mexico City. The distribution centers operate a fleet of approximately 792 trucks that make deliveries to each store approximately twice per week.
Seasonality
OXXO stores experience periods of high demand in December, as a result of the holidays, and in July and August, as a result of increased consumption of beer and soft drinks during the hot summer months. The months of November and February are generally the weakest sales months for OXXO stores. In general, colder weather during these months reduces store traffic and consumption of cold beverages.
Entry into Drugstore Market
During 2013, FEMSA Comercio entered the drugstore market in Mexico through two transactions. FEMSA Comercio through CCF, closed the acquisition of Farmacias YZA, a leading drugstore operator in Southeast Mexico, headquartered in Merida, Yucatan. The founding shareholders of Farmacias YZA hold a 25% stake in CCF. Following this transaction, on May 13, 2013, CCF acquired Farmacias Moderna, a leading drugstore operator in the western state of Sinaloa.
In December 2014, FEMSA Comercio through CCF agreed to acquire 100% of Farmacias Farmacón, a a regional pharmacy chain consisting of convenience213 stores in Mexico, measured in termsthe northwestern Mexican states of number of stores as of December 31, 2011, under the trade name OXXO. As of December 31, 2011,Sinaloa, Sonora, Baja California and Baja California Sur. With this transaction, FEMSA Comercio operated 9,561 OXXO stores,will reach a total of which 9,538approximately 803 pharmacy stores. The transaction is pending customary regulatory approvals, and is expected to close during the second quarter of 2015.
The rationale for entering this new market is anchored on our belief that FEMSA Comercio has developed certain capabilities and skills that should be applicable and useful in the operation of other small retail formats. These capabilities include site selection, logistics, business processes, human resources, inventory and supplier management. The drugstore market in Mexico is very fragmented and FEMSA Comercio believes it is well equipped to create value by entering this market and pursuing a growth strategy that maximizes the opportunity.
Entry into Quick Service Restaurant Market
Following the same rationale that its capabilities and skills are located throughoutwell suited to different types of small-format retail, during 2013 FEMSA Comercio also entered the country,quick service restaurant market in Mexico through the 80% acquisition of Doña Tota. This is a leading regional chain specializing in Mexican food with a particularly strong presence in the northernnortheast of the country. This acquisition presented FEMSA Comercio with the opportunity to grow Doña Tota’s stand-alone store base across the country, while also offering the benefit of advancing FEMSA Comercio’s prepared food capabilities and expertise.
Gas Station Market
Since 1995, FEMSA Comercio has been providing services and assets for the operation of gasoline service stations through agreements with third parties that own Petroleos Mexicanos (PEMEX) franchises, using the commercial brand OXXO Gas. As of December 31, 2014 there were 227 OXXO Gas stations, most of them adjacent to OXXO stores.
Mexican legislation has historically precluded FEMSA Comercio from participating in the retail sale of gasoline and therefore precluded ownership of PEMEX franchises, given our foreign institutional investor base. In response to recent changes in this legislation, FEMSA Comercio has agreed to acquire the related PEMEX franchises from the aforementioned third parties and plans to lease, acquire or open more gasoline service stations in the future.
Other Stores
FEMSA Comercio also operates other small-format stores, which include soft discount stores with a focus on perishables and liquor stores.
Equity Investment in the Heineken Group
As of December 31, 2014, FEMSA owned a non-controlling interest in the Heineken Group, one of the world’s leading brewers. As of December 31, 2014, our 20% economic interest in the Heineken Group was comprised of 43,018,320 shares of Heineken Holding N.V. and 72,182,203 shares of Heineken N.V. For 2014, FEMSA recognized equity income of Ps. 5,244 million regarding its 20% economic interest in the Heineken Group; see Note 10 to our audited consolidated financial statements.
As described above, FEMSA Comercio has a distribution agreement with Cuauhtémoc Moctezuma (which is now a part of the Heineken Group) pursuant to which OXXO stores only carry beer brands produced and distributed by Cuauhtémoc Moctezuma. OXXO stores will continue to benefit from the existing relationship under which Cuauhtémoc Moctezuma will continue to be the exclusive supplier of beer to OXXO until June 2020. As of April 30, 2010, Coca-Cola FEMSA has agreed with Cervejarias Kaiser (also now part of the Heineken Group) to continue to distribute and sell the Kaiser beer portfolio in Coca-Cola FEMSA’s Brazilian territories for a 20-year term beginning in 2003, consistent with the arrangement already in place. In addition, our logistic services subsidiary provides certain services to Cuauhtémoc Moctezuma and its subsidiaries.
Our other business consists of the following smaller operations that support our core operations:
Our logistics services subsidiary provides a broad range of logistics and vehicle maintenance services to Coca-Cola FEMSA, FEMSA Comercio and third-party clients in the beverages, consumer products and retail industries. It has operations in Mexico, Brazil, Colombia, Panama, Costa Rica, Nicaragua and Perú.
Our refrigeration business produces vertical and horizontal commercial refrigerators for the soft drink, beer and food industries, with an annual capacity of 535,800 units at December 31, 2014. In 2014, this business sold 418,064 refrigeration units, 30% of which were sold to Coca-Cola FEMSA, and the remaining 23remainder of which were sold to third parties.
Our corporate services subsidiary employs our corporate staff, including the personnel managing the areas of finance, corporate accounting, taxation, legal, financial and strategic planning, human resources, corporate affairs and internal audit. Through this subsidiary, we direct, control, supervise and review the operations of our sub-holding companies. As of December 31, 2014, FEMSA Comercio and our other business subsidiaries pay management fees for the services provided to them. In addition, Coca-Cola FEMSA has entered into a services agreement pursuant to which it pays for specific services.
Description of Property, Plant and Equipment
As of December 31, 2014, we owned all of our manufacturing facilities and substantially all of our warehouses and distribution centers. Our properties primarily consisted of production and distribution facilities for our soft drink operations and office space. In addition, FEMSA Comercio owns approximately 11.2% of the OXXO store locations, while the other stores are located in Bogotá, Colombia.
FEMSA Comercio, the largest single customer of Cuauhtémoc Moctezuma and of the Coca-Cola system in Mexico, was established by FEMSA in 1978 when two OXXO stores were opened in Monterrey, one store in Mexico City and another store in Guadalajara. The motivating factor behind FEMSA’s entrance into the retail industry was to enhance beer sales through company-owned retail outlets as well as to gather information on customer preferences. In 2011, a typical OXXO store carried 2,324 different store keeping units (SKUs) in 31 main product categories.
In recent years, FEMSA Comercio has represented an effective distribution channel for our beverage products, as well as a rapidly growing point of contact with our consumers. Based on the belief that location plays a major role in the long-term success of a retail operation such as a convenience store, as well as a role in our continually improving ability to accelerate and streamline the new-store development process, FEMSA Comercio has focused on a strategy of rapid, profitable growth. FEMSA Comercio opened 960, 1,092 and 1,135 net new OXXO stores in 2009, 2010 and 2011, respectively. The accelerated expansion in the number of stores yielded total revenue growth of 19.0% to reach Ps. 74,112 million in 2011. Same store sales increased an average of 9.2%, driven by increases in store traffic and average customer ticket. Starting in 2008, FEMSA Comercio revenues reflect an accounting effect of the mix shift from physical prepaid wireless air-time cards to the sale of electronic air-time for which only the margin is recorded, not the full revenue amount of the electronic recharge. FEMSA Comercio performed approximately 2.7 billion transactions in 2011 compared to 2.3 billion transactions in 2010.
Business Strategy
A fundamental element of FEMSA Comercio’s business strategy is to utilize its position in the convenience store market to grow in a cost-effective and profitable manner. As a market leader in convenience store retailing, based on internal company surveys, management believes that FEMSA Comercio has an in-depth understanding of its markets and significant expertise in operating a national store chain. FEMSA Comercio intends to continue increasing its store base while capitalizing on the market knowledge gained at existing stores.
FEMSA Comercio has developed proprietary models to assist in identifying appropriate store locations, store formats and product categories. Its model utilizes location-specific demographic data and FEMSA Comercio’s experience in similar locations to fine tune the store format and product offerings to the target market. Market segmentation is becoming an important strategic tool, and it should increasingly allow FEMSA Comercio to improve the operating efficiency of each location and the overall profitability of the chain.
FEMSA Comercio has made and will continue to make significant investments in IT to improve its ability to capture customer information from its existing stores and to improve its overall operating performance. The majority of products carried through OXXO stores are bar-coded, and all OXXO stores are equipped with point-of-sale systemsproperties that are integrated into a company-wide computer network. To implement revenue management strategies, FEMSA Comercio created a division in charge of product category management for products, such as beverages, fast food and perishables, to enhance and better utilize its consumer information base and market intelligence capabilities. FEMSA Comercio utilizes a technology platform supported by an enterprise resource planning (ERP) system, as well as other technological solutions such as merchandising and point-of-sale systems, which will allow FEMSA Comercio to continue redesigning its key operating processes and enhance the usefulness of its market information going forward. In addition, FEMSA Comercio has expanded its operations by opening six new stores in Bogotá, Colombia in 2011.rented under long-term lease arrangements with third parties.
FEMSA Comercio has adopted innovative promotional strategies in order to increase store trafficThe table below summarizes by country the installed capacity and sales. In particular, FEMSA Comercio sells high-frequency items such as beverages, snacks and cigarettes at competitive prices. FEMSA Comercio’s ability to implement this strategy profitably is partly attributable to the sizepercentage utilization of the OXXO chain, as FEMSA Comercio is able to work together with its suppliers to implement their revenue-management strategies through differentiated promotions. OXXO’s national and local marketing and promotional strategies are an effective revenue driver and a means of reaching new segments of the population while strengthening the OXXO brand. For example, the organization has refined its expertise in executing cross promotions (discounts on multi-packs or sales of complementary products at a special price) and targeted promotions to attract new customer segments, such as housewives, by expanding the offerings in the grocery product category in certain stores. FEMSA Comercio is also strengthening its capabilities to increasingly provide consumers with services such as utility bill payment and other basic transactions.Coca-Cola FEMSA’s production facilities:
Store Locations
With 9,538 OXXO stores in Mexico and 23 stores in Colombia as of December 31, 2011, FEMSA Comercio operates the largest convenience store chain in Latin America measured by number of stores. OXXO stores are concentrated in the northern part of Mexico, but also have a growing presence in the rest of the country.
FEMSA Comercio
Regional Allocation of OXXO Stores in Mexico and Latin America(*)
as of December 31, 2011
FEMSA Comercio has aggressively expanded its number of stores over the past several years. The average investment required to open a new store varies, depending on location and format and whether the store is opened in an existing retail location or requires construction of a new store. FEMSA Comercio is generally able to use supplier credit to fund the initial inventory of new stores.
Growth in Total OXXO Stores
Year Ended December 31, | ||||||||||||||||||||
2011 | 2010 | 2009 | 2008 | 2007 | ||||||||||||||||
Total OXXO stores | 9,561 | 8,426 | 7,334 | 6,374 | 5,563 | |||||||||||||||
Store growth (% change over previous year) | 13.5 | % | 14.9 | % | 15.1 | % | 14.6 | % | 14.8 | % |
FEMSA Comercio currently expects to continue the growth trend established over the past several years by emphasizing growth in areas of high economic potential in existing markets and by expanding in underserved and unexploited markets. Management believes that the southeast part of Mexico is particularly underserved by the convenience store industry.
The identification of locations and pre-opening planning in order to optimize the results of new stores are important elements in FEMSA Comercio’s growth plan. FEMSA Comercio continuously reviews store performance against certain operating and financial benchmarks to optimize the overall performance of the chain. Stores unable to maintain benchmark standards are generally closed. Between December 31, 2007 and 2011, the total number of OXXO stores increased by 3,998, which resulted from the opening of 4,091 new stores and the closing of 93 existing stores.
Competition
OXXO competes in the overall retail market, which we believe is highly competitive. OXXO convenience stores face direct competition from 7-Eleven, Super Extra, Super City and Círculo K, and other local convenience stores as well as from a number of other modern and traditional retail formats. OXXO competes both for consumers and for new locations for stores and the managers to operate those stores. Based on an internal market survey conducted by FEMSA Comercio, management believes that FEMSA Comercio operates approximately 66% of the stores in Mexico that could be considered part of the convenience store segment of the retail market as of the end of December 31, 2011. OXXO convenience stores also face competition from numerous small chains of retailers across Mexico and from retailers that participate with store formats other than convenience stores. Furthermore, FEMSA Comercio operates in the 32 Mexican states and has much broader geographical coverage than any of its competitors in Mexico.
Market and Store Characteristics
Market Characteristics
FEMSA Comercio is placing increased emphasis on market segmentation and differentiation of store formats to more appropriately serve the needs of customers on a location-by-location basis. The principal segments include residential neighborhoods, commercial and office locations and stores near schools and universities, along with other types of specialized locations.
Approximately 62%64.3% of OXXO’sOXXO stores’ customers are between the ages of 15 and 35. FEMSA Comercio also segments the market according to demographic criteria, including income level.
OXXO Store Characteristics
The average size of an OXXO store is approximately 106104 square meters of selling space, excluding space dedicated to refrigeration, storage or parking. The average constructed area of a store is approximately 186187 square meters and, when parking areas are included, the average store size is approximately 432421 square meters.
FEMSA Comercio—Operating Indicators
Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||||||||||||||||||||||
2011 | 2010 | 2009 | 2008 | 2007 | 2014 | 2013 | 2012 | 2011 | 2010 | |||||||||||||||||||||||||||||||
(percentage increase compared to previous year) | (percentage increase compared to previous year) | |||||||||||||||||||||||||||||||||||||||
Total FEMSA Comercio revenues | 19.0 | % | 16.3 | % | 13.6 | % | 12.0 | % | 14.3 | % | 12.4 | % | 12.9 | % | 16.6 | % | 19.0 | % | 16.3 | % | ||||||||||||||||||||
OXXO same-store sales(1) | 9.2 | % | 5.2 | % | 1.3 | % | 0.4 | % | 3.3 | % | 2.7 | % | 2.4 | % | 7.7 | % | 9.2 | % | 5.2 | % |
(1) | Same-store sales growth is calculated by comparing the sales of stores for each year that have been in operation for more than 12 months with the sales of those same stores during the previous year. |
Beer, cigarettes, soft drinks snacks and cellular telephone air-timeother beverages and snacks represent the main product categories for OXXO stores. FEMSA Comercio has a distribution agreement with Cuauhtémoc Moctezuma (which is now part of the Heineken Group). As a result of this agreement, OXXO stores only carry beer brands produced and distributed by Cuauhtémoc Moctezuma. OXXO stores will continue to benefit from the existing relationship under which Cuauhtémoc Moctezuma will continue to be the exclusive supplier of beer to OXXO until June 2020. Prior to 2001, OXXO stores had informal agreements with Coca-Cola bottlers, including Coca-Cola FEMSA’s territories in central Mexico, to sell only their products. Beginning in 2001, certain OXXO stores began selling other brands of sparkling beverages in some cities in Mexico.
Approximately 67%59% of OXXO stores are operated by independent managers responsible for all aspects of store operations. The managers are commission agents and are not employees of FEMSA Comercio. Each store manager is the legal employer of the store’s staff, which typically numbers six people per store. FEMSA Comercio continually invests in on-site operating personnel, with the objective of promoting loyalty, customer service and low personnel turnover in the stores.
Advertising and Promotion
FEMSA Comercio’s marketing efforts for OXXO stores include both specific product promotions and image advertising campaigns. These strategies seek to increase store traffic and sales, and to reinforce the OXXO name and market position.
FEMSA Comercio manages its advertising for OXXO stores on three levels depending on the nature and scope of the specific campaign: local or store-specific, regional and national. Store-specific and regional campaigns are closely monitored to ensure consistency with the overall corporate image of OXXO stores and to avoid conflicts with national campaigns. FEMSA Comercio primarily uses point of purchase materials, flyers, handbills and print and radio media for promotional campaigns, although television is used occasionally for the introduction of new products and services. The OXXO store chain’s image and brand name are presented consistently across all stores, irrespective of location.
Inventory and Purchasing
FEMSA Comercio has placed considerable emphasis on improving operating performance. As part of these efforts, FEMSA Comercio continues to invest in extensive information management systems to improve inventory management. Electronic data collection has enabled FEMSA Comercio to reduce average inventory levels. Inventory replenishment decisions are carried out on a store-by-store basis.
Management believes that the OXXO store chain’s scale of operations provides FEMSA Comercio with a competitive advantage in its ability to realize strategic alliances with suppliers. General category offerings are determined on a national level, although purchasing decisions are implemented on a local, regional or national level, depending on the nature of the product category. Given the fragmented nature of the retail industry in Mexico in general, Mexican producers of beer, soft drinks, bread, dairy products, snacks, cigarettes and other high-frequency products have established proprietary distribution systems with extensive direct distribution routes. As a result, approximately 52%53% of the OXXO store chain’s total sales consist of products that are delivered directly to the stores by suppliers. Other products with longer shelf lives are distributed to stores by FEMSA Comercio’s distribution
system, which includes 1316 regional warehouses located in Monterrey, Guadalajara, Mexicali, Mérida, León, Obregón, Puebla, Queretaro, Chihuahua, Reynosa, Saltillo, Tijuana, Toluca, Villahermosa and two in Mexico City. The distribution centers operate a fleet of approximately 627792 trucks that make deliveries to each store approximately twice per week.
Seasonality
OXXO stores experience periods of high demand in December, as a result of the holidays, and in July and August, as a result of increased consumption of beer and soft drinks during the hot summer months. The months of November and February are generally the weakest sales months for OXXO stores. In general, colder weather during these months reduces store traffic and consumption of cold beverages.
Entry into Drugstore Market
During 2013, FEMSA Comercio entered the drugstore market in Mexico through two transactions. FEMSA Comercio through CCF, closed the acquisition of Farmacias YZA, a leading drugstore operator in Southeast Mexico, headquartered in Merida, Yucatan. The founding shareholders of Farmacias YZA hold a 25% stake in CCF. Following this transaction, on May 13, 2013, CCF acquired Farmacias Moderna, a leading drugstore operator in the western state of Sinaloa.
In December 2014, FEMSA Comercio through CCF agreed to acquire 100% of Farmacias Farmacón, a a regional pharmacy chain consisting of 213 stores in the northwestern Mexican states of Sinaloa, Sonora, Baja California and Baja California Sur. With this transaction, FEMSA Comercio will reach a total of approximately 803 pharmacy stores. The transaction is pending customary regulatory approvals, and is expected to close during the second quarter of 2015.
The rationale for entering this new market is anchored on our belief that FEMSA Comercio has developed certain capabilities and skills that should be applicable and useful in the operation of other small retail formats. These capabilities include site selection, logistics, business processes, human resources, inventory and supplier management. The drugstore market in Mexico is very fragmented and FEMSA Comercio believes it is well equipped to create value by entering this market and pursuing a growth strategy that maximizes the opportunity.
Entry into Quick Service Restaurant Market
Following the same rationale that its capabilities and skills are well suited to different types of small-format retail, during 2013 FEMSA Comercio also entered the quick service restaurant market in Mexico through the 80% acquisition of Doña Tota. This is a leading regional chain specializing in Mexican food with a particularly strong presence in the northeast of the country. This acquisition presented FEMSA Comercio with the opportunity to grow Doña Tota’s stand-alone store base across the country, while also offering the benefit of advancing FEMSA Comercio’s prepared food capabilities and expertise.
Gas Station Market
Since 1995, FEMSA Comercio has been providing services and assets for the operation of gasoline service stations through agreements with third parties that own Petroleos Mexicanos (PEMEX) franchises, using the commercial brand OXXO Gas. As of December 31, 2014 there were 227 OXXO Gas stations, most of them adjacent to OXXO stores.
Mexican legislation has historically precluded FEMSA Comercio from participating in the retail sale of gasoline and therefore precluded ownership of PEMEX franchises, given our foreign institutional investor base. In response to recent changes in this legislation, FEMSA Comercio has agreed to acquire the related PEMEX franchises from the aforementioned third parties and plans to lease, acquire or open more gasoline service stations in the future.
Other Stores
FEMSA Comercio also operates other small formatsmall-format stores, which include soft discount stores with a focus on perishables and liquor stores and smaller convenience stores.
FEMSA Cerveza and Equity Method Investment in the Heineken Group
Until April 30, 2010, FEMSA Cerveza was our wholly-owned subsidiary, producing beer in Mexico and Brazil and exporting its products to more than 50 countries worldwide, with North America being its most important export market, followed by certain markets in Europe, Latin America and Asia. As of December 31, 2009,2014, FEMSA Cerveza was ranked the tenth-largest brewer in the world in terms of sales volume, and in Mexico, its main market, FEMSA Cerveza was ranked the second-largest beer producer in terms of sales volume. In 2009, approximately 66.4% of FEMSA Cerveza’s sales volume came from Mexico, with the remaining 24.8% from Brazil and 8.8% from exports. As of December 31, 2009, FEMSA Cerveza sold 40.548 million hectoliters of beer and produced and/or distributed 21 brands of beer in 14 different presentations resulting in a portfolio of 111 different product offerings in Mexico.
As of December 31, 2009, FEMSA Cerveza represented 23.5% of our total revenues and 34.1% of our total assets. For the period from January 1, 2010 to April 30, 2010, FEMSA Cerveza contributed net income of Ps. 706 million to our net income. On April 30, 2010, FEMSA announced the closing of the transaction pursuant to which FEMSA agreed to exchange 100% of its beer operations for a 20% economic interest in the Heineken Group. The principal terms of the Heineken transaction documents are summarized below in “Item 10. Additional Information—Material Contracts.”
As of April 30, 2010, FEMSA ownsowned a non-controlling interest in the Heineken Group, one of the world’s leading brewers. OurAs of December 31, 2014, our 20% economic interest in the Heineken Group was initially comprised of 43,018,320 shares of Heineken Holding N.V. and 43,009,69972,182,203 shares of Heineken N.V., with an additional 29,172,504 Allotted Shares to be delivered pursuant to the ASDI. As of December 31, 2011, the delivery of the Allotted Shares had been completed. See Note 9 to our audited consolidated financial statements. For 2011,2014, FEMSA recognized equity income of Ps. 5,0805,244 million regarding its 20% economic interest in the Heineken Group.Group; see Note 10 to our audited consolidated financial statements.
As described above, FEMSA Comercio has a distribution agreement with Cuauhtémoc Moctezuma (which is now a part of the Heineken Group) pursuant to which OXXO stores only carry beer brands produced and distributed by Cuauhtémoc Moctezuma. OXXO stores will continue to benefit from the existing relationship under which Cuauhtémoc Moctezuma will continue to be the exclusive supplier of beer to OXXO until June 2020. As of April 30, 2010, Coca-Cola FEMSA has agreed with Cervejarias Kaiser (also now part of the Heineken Group) to continue to distribute and sell the Kaiser beer portfolio in Coca-Cola FEMSA’s Brazilian territories for a 20-year term beginning in 2003, consistent with the arrangement already in place. In addition, our corporate and sharedlogistic services subsidiary will continue to provideprovides certain services to Cuauhtémoc Moctezuma and its subsidiaries.
Our other business consists of the following smaller operations that support our core operations:
Our logistics services subsidiary provides a broad range of logistics and vehicle maintenance services to Coca-Cola FEMSA, FEMSA Comercio and third-party clients in the beverages, consumer products and retail industries. It has operations in Mexico, Brazil, Colombia, Panama, Costa Rica, Nicaragua and Perú.
Our refrigeration business produces vertical and horizontal commercial refrigerators for the soft drink, beer and food industries, with an annual capacity of 404,000535,800 units at December 31, 2011.2014. In 2011,2014, this business sold 350,040418,064 refrigeration units, 30% of which were sold to Coca-Cola FEMSA, and the remainder of which were sold to third parties. Until December 31, 2010, our labeling and flexible packaging business was our wholly-owned subsidiary. In 2010, this business sold 14% of its label sales volume to Cuauhtémoc Moctezuma, 20% to Coca-Cola FEMSA and 66% to third parties. Our labeling and flexible packaging business was sold on December 31, 2010.
Our logistics services subsidiary provides a broad range of logistics and vehicle maintenance services to Coca-Cola FEMSA, FEMSA Comercio, Cuauhtémoc Moctezuma and third-party clients in the beverages, consumer products and retail industries. It has operations in Mexico, Brazil, Colombia, Panama, Costa Rica and Nicaragua.
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Our corporate services subsidiary employs all of our corporate staff, including the personnel managing the areas of finance, corporate accounting, taxation, legal, financial and strategic planning, human resources, corporate affairs and internal audit. Through this subsidiary, we direct, control, supervise and review the operations of our sub-holding companies. As of December 31, 2011,2014, FEMSA Comercio FEMSA Logística and our packagingother business subsidiaries pay management fees for the services provided to them. In addition, Coca-Cola FEMSA has entered into a services agreement pursuant to which it pays for specific services. As part of the Heineken transaction, the corporate and shared services subsidiaries continue to provide some limited corporate services and shared services to subsidiaries of Cuauhtémoc Moctezuma (now part of the Heineken Group), for which such companies continue to pay.
Description of Property, Plant and Equipment
As of December 31, 2011,2014, we owned all of our manufacturing facilities and substantially all of our warehouses and distribution centers. Our properties primarily consisted of production and distribution facilities for our soft drink operations and office space. In addition, FEMSA Comercio owns approximately 10.9%11.2% of the OXXO store locations, while the other stores are located in properties that are rented under long-term lease arrangements with third parties.
The table below sets forthsummarizes by country the location, principal useinstalled capacity and percentage utilization of Coca-Cola FEMSA’s production area of our production facilities, each of which is owned by Coca-Cola FEMSA.
Bottling Facility Summary
Production Facilities As of December 31, 20112014
Country | Installed Capacity (thousands of unit cases) | Utilization(1) (%) | ||||||
Mexico | 2,939,936 | 58 | % | |||||
Guatemala | 45,500 | 69 | % | |||||
Nicaragua | 67,700 | 68 | % | |||||
Costa Rica | 81,200 | 56 | % | |||||
Panama | 56,700 | 57 | % | |||||
Colombia | 532,616 | 56 | % | |||||
Venezuela | 275,542 | 86 | % | |||||
Brazil | 1,044,932 | 67 | % | |||||
Argentina | 340,397 | 65 | % |
(1) | Annualized rate. |
The table below summarizes by country the location and facility area of each of Coca-Cola FEMSA’s production facilities.
Bottling Facility by Location
As of December 31, 2014
Country |
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( of sq. meters) | ||||||||
Mexico | San Cristóbal de las Casas, Chiapas | 45 | ||||||
Cuautitlán, Estado de México | 35 | |||||||
Los Reyes la Paz, Estado de México | 50 | |||||||
Toluca, Estado de México | 317 | |||||||
León, Guanajuato | 124 | |||||||
Morelia, Michoacán | 50 | |||||||
Ixtacomitán, Tabasco | 117 | |||||||
Apizaco, Tlaxcala | 80 | |||||||
Coatepec, Veracruz | 142 | |||||||
La Pureza Altamira, Tamaulipas | 300 | |||||||
Poza Rica, Veracruz | 42 | |||||||
Pacífico, Estado de México | 89 | |||||||
Cuernavaca, Morelos | 37 | |||||||
Toluca, Estado de México (Ojuelos) | 41 | |||||||
San Juan del Río, Querétaro | 84 | |||||||
Querétaro, Querétaro | 80 | |||||||
Cayaco, Acapulco | 104 | |||||||
Guatemala | Guatemala City | 46 | ||||||
Nicaragua | Managua | 54 | ||||||
Costa Rica | Calle Blancos, San José | 52 | ||||||
Coronado, San José | 14 | |||||||
Panama | Panama City | 29 | ||||||
Colombia | Barranquilla | 37 | ||||||
Bogotá, DC | 105 | |||||||
Bucaramanga | 26 | |||||||
Cali | 76 | |||||||
Manantial, Cundinamarca | 67 | |||||||
Tocancipá | 298 | |||||||
Medellín | 47 |
| Plant | ||||||
(thousands of sq. meters) | |||||||
Venezuela | Antímano | 15 | |||||
Barcelona | 141 | ||||||
Maracaibo | 68 | ||||||
Valencia | 100 | ||||||
Brazil | Campo Grande | 36 | |||||
Jundiaí | 191 | ||||||
Mogi das Cruzes | 119 | ||||||
Belo Horizonte | 73 | ||||||
108 | |||||||
Maringá | 160 | ||||||
Marilia | 159 | ||||||
Curitiba | 119 | ||||||
Baurú | 39 | ||||||
Itabirito | 320 | ||||||
Argentina | Alcorta, Buenos Aires | 73 | |||||
Monte Grande, Buenos Aires | 32 |
We maintain an “all risk” insurance policy covering our properties (owned and leased), machinery and equipment and inventories as well as losses due to business interruptions. The policy covers damages caused by natural disaster, including hurricane, hail, earthquake and damages caused by human acts, including explosion, fire, vandalism riot and losses incurred in connection withriot. We also maintain a freight transport insurance policy that covers damages to goods in transit. In addition, we maintain an “all risk”a liability insurance policy that covers product liability. We purchase our insurance coverage through an insurance broker. TheIn 2014, the policies for “all risk” property insurance, freight transport insurance and “all risk” liability insurance arewere issued by ACE Seguros, S.A., and the Our “all risk” coverage iswas partially reinsured in the international reinsurance market. We believe that our coverage is consistent with the coverage maintained by similar companies operating in Mexico.companies.
Capital Expenditures and Divestitures
Our consolidated capital expenditures, net of disposals, for the years ended December 31, 2011, 2010,2014, 2013 and 20092012 were Ps. 12,51518,163 million, Ps. 11,17117,882 million and Ps. 9,10315,560 million respectively, and were for the most part financed from cash from operations generated by our subsidiaries. These amounts were invested in the following manner:
Year Ended December 31, | ||||||||||||
2011 | 2010 | 2009 | ||||||||||
(in millions of Mexican pesos) | ||||||||||||
Coca-Cola FEMSA | Ps. | 7,826 | Ps. | 7,478 | Ps. | 6,282 | ||||||
FEMSA Comercio | 4,096 | 3,324 | 2,668 | |||||||||
Other | 593 | 369 | 153 | |||||||||
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Total(1) | Ps. | 12,515 | Ps. | 11,171 | Ps. | 9,103 |
Year Ended December 31, | ||||||||||||
2014 | 2013 | 2012 | ||||||||||
(In millions of Mexican pesos) | ||||||||||||
Coca-Cola FEMSA | Ps. 11,313 | Ps. 11,703 | Ps. 10,259 | |||||||||
FEMSA Comercio | 5,191 | 5,683 | 4,707 | |||||||||
Other | 1,659 | 496 | 594 | |||||||||
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Total | Ps. 18,163 | Ps. 17,882 | Ps. 15,560 |
Coca-Cola FEMSA
During 2011,In 2014, Coca-Cola FEMSA’sFEMSA focused its capital expenditures focused on investments in (1) increasing plant production capacity, (2) placing coolers with retailers, (3) returnable bottles and cases, (4) improving the efficiency of its distribution infrastructure and IT. Capital expenditures in Mexico(5) information technology. Through these measures, Coca-Cola FEMSA strives to improve its profit margins and Central America were approximately Ps. 4,117 million and accounted for approximately 53% of Coca-Cola FEMSA’s capital expenditures, with South America representing the balance.overall profitability.
FEMSA Comercio
FEMSA Comercio’s principal investment activity is the construction and opening of new stores. During 2011,2014, FEMSA Comercio opened 1,1351,132 net new OXXO stores. FEMSA Comercio invested Ps. 4,0965,191 million in 20112014 in the addition of new stores, warehouses and improvements to leased properties.
CompetitionAntitrust Legislation
TheLey Federal de Competencia Económica (Federal Economic Competition Law or Mexican CompetitionAntitrust Law) became effective on June 22, 1993. The Mexican Competition Law and theReglamento de la Ley Federal de Competencia Económica (Regulations under the Mexican Competition Law), effective as of October 13, 2007, regulate monopolies and1993, regulating monopolistic practices and requirerequiring Mexican government approval of certain mergers and acquisitions. The Mexican CompetitionFederal Antitrust Law subjects the activities of certain Mexican companies, including us, to regulatory scrutiny.
In addition, the Regulations underJune 2013, following a comprehensive reform to the Mexican CompetitionConstitution, a new antitrust authority with autonomy was created: the Federal Antitrust Commission (Comisión Federal de Competencia Económica, or the CFCE). As a result of these amendments, new antitrust and telecommunications specialized courts were created and commenced hearing cases in August 2013. In July 2014, a new Federal Antitrust Law prohibit members of any trade association from reaching any agreement relatingcame into effect based on the amended constitutional provisions.
These amendments granted more power to the priceCFCE, including the ability to regulate essential facilities, order the divestment of their products.assets and eliminate barriers to competition, set higher fines for violations of the Federal Antitrust Law, implement important changes to rules governing mergers and anti-competitive behavior and limit the availability of legal defenses against the application of the law. Management believes that we are currently in compliance in all material respects with Mexican competitionantitrust legislation.
In Mexico and in some of the other countries in which we operate, we are involved in different ongoing competition related proceedings. We believe that the outcome of these proceedings will not have a material adverse effect on our financial position or results from operations. results.See “Item 8. Financial Information—Legal Proceedings—Coca-Cola FEMSA—Antitrust Matters.FEMSA.”
Price Controls
Voluntary price restraints or statutory price controls have been imposed historically in several of the countries in which Coca-Cola FEMSA operates. Currently, there are no price controls on Coca-Cola FEMSA’s products in any of itsthe territories in which it has operations, except for (i)those in Argentina, where authorities directly supervise certainfive products sold through supermarkets as a measure to control inflation, and (ii) Venezuela, where the government has recently imposed price controls on certain products, including still bottled water. In addition, in January 2014, the Venezuelan government passed the Fair Prices Law (Ley Orgánica de Precios Justos), which was amended in November 2014 mainly to increase applicable fines and penalties. This law substitutes both the Access to Goods and Services Defense Law (Ley para la Defensa y Acceso a las Personas a los Bienes y Servicios) and the Fair Costs and Prices Law (Ley de Costos y Precios Justos), which have both been repealed. The purpose of this law is to establish regulations and administrative processes to impose a limit on profits earned on the sale of goods, including our products, seeking to maintain price stability of, and equal access to, goods and services. This law imposes an obligation to manufacturing companies to label products with the fair or maximum sales’ price for each product. Coca-Cola FEMSA is currently in the process of implementing the necessary procedures and expects to be in compliance with this requirement by the imposed deadline. This law also creates the National Office of Costs and Prices which main role is to oversee price controls and set maximum retail prices on certain consumer goods and services. We cannot assure you that Coca-Cola FEMSA will be in compliance at all times with these laws based on changes, market dynamics in these two countries and the lack of clarity of certain basic aspects of the applicable law in Venezuela. Any such changes and potential violations may have an adverse impact on Coca-Cola FEMSA.See “Item 3. Key Information—Risk Factors—Regulatory developments may adversely affect Coca-Cola FEMSA’s business.”
Mexican Tax Reform
In December of 2013, the Mexican government enacted a package of tax reforms (the “2014 Tax Reform”) which includes several significant changes to tax laws, discussed in further detail below, that entered into effect on January 1, 2014. The most significant changes are as follows:
The introduction of a new withholding tax at the rate of 10% for dividends and/or distributions of earnings generated in 2014 and beyond;
The elimination of the exemption on gains from the sale of shares through a stock exchange recognized under applicable Mexican tax law. The gain will be taxable at the rate of 10% and will be paid by the shareholder based on the information provided by the financial intermediary. Transferors that are residents of a country with which Mexico has entered into a tax treaty for the avoidance of double taxation will be exempt.See “Item 10. Additional Information—Taxation—Mexican Taxation.”
A fee of one Mexican peso per liter on the sale and import of flavored beverages with added sugar, and an excise tax of 8% on food with caloric content equal to, or greater than 275 kilocalories per 100 grams of product;
The prior 11% value added tax (VAT) rate that applied to transaction in the border region was raised to 16%, matching the general VAT rate applicable in the rest of Mexico;
The elimination of the tax on cash deposits (IDE) and the business flat tax (IETU);
Deductions on exempt payroll items for workers are limited to 53%;
The income tax rate in 2013 and 2012 was 30%. Scheduled decreases to the income tax rate that would have reduced the rate to 29% in 2014 and 28% in 2015 and thereafter, were canceled in connection with the 2014 Tax Reform;
The repeal of the existing tax consolidation regime, which is effective as of January 1, 2014, modified the payment term of a tax on assets payable of Ps. 180, which will be paid over the following 5 years instead of an indefinite term; and
The introduction of a new optional tax integration regime (a modified form of tax consolidation), which replaces the previous tax consolidation regime. The new optional tax integration regime requires an equity ownership of at least 80% for qualifying subsidiaries and would allow us to defer the annual tax payment of our profitable participating subsidiaries for a period equivalent to 3 years to the extent their individual tax expense exceeds the integrated tax expense of the Company.
Similar to other affected entities in the industry, Coca-Cola FEMSA has filed constitutional challenges (amparo) against the new special tax referred to above on the production, sale and importation of beverages with added sugar and HFCS. Coca-Cola FEMSA cannot ensure that these measures will have the desired effect or that Coca-Cola FEMSA will prevail in its constitutional challenge.
Other Recent Tax Reforms
On January 1, 2015, a general tax reform became effective in Colombia. This reform included the imposition of a new temporary tax on net equity through 2017 to Colombian residents and non-residents who own property in Colombia directly or indirectly through branches or permanent establishments. The relevant taxable base will be determined annually based on a formula. For net equity that exceeds 5.0 billion Colombian pesos (approximately US$ 2.1 million) the rate will be 1.15% in 2015, 1.00% in 2016 and 0.40% in 2017. In addition, the tax reform in Colombia imposed that the supplementary income tax at a rate of 9% as contributions to social programs, which was previously scheduled to decrease to 8% by 2015, will remain indefinitely. Additionally, this tax reform included the imposition of a temporary contribution to social programs at a rate of 5%, 6%, 8% and 9% for the years 2015, 2016, 2017 and 2018, respectively. Finally, this reform establishes an income tax deduction of 2% of value-added tax paid in the acquisition or import of hard assets, such as tangible and amortizable assets that are not sold or transferred in the ordinary course of business and that are used for the production of goods or services.
In Guatemala, the income tax rate for 2014 was 28% and it decreased for 2015 to 25%, as scheduled.
On November 18, 2014, a tax reform became effective in Venezuela. This reform included changes on how the carrying value of operating losses is reported. The reform established that operating losses carried forward year over year (but limited to three fiscal years) may not exceed 25% of the taxable income in the relevant period. The reform also eliminated the possibility to carry over losses relating to inflationary adjustments and included changes that grant Venezuelan tax authorities broader powers and authority in connection with their ability to enact administrative rulings related to income tax withholding and to collect taxes and increase fines and penalties for tax-related violations, including the ability to confiscate assets without a court order.
Taxation of Sparkling Beverages
All the countries in which Coca-Cola FEMSA operates, except for Panama, impose a value-added tax on the sale of sparkling beverages, with a rate of 16% in Mexico, beginning in January 2011, 12% in Guatemala, 15% in Nicaragua, 13%16.2% in Costa Rica, 16% in Colombia (applied only to the first sale in the supply chain), 12% in Venezuela, (beginning21% in April 2009),Argentina, and in Brazil 17% (Matoin the states of Mato Grosso do Sul)Sul and Goiás and 18% (Sãin the states of São Paulo, Minas Gerais, Paraná and Minas Gerais)Rio de Janeiro. The state of Rio de Janeiro also charges an additional 1% as a contribution to a poverty eradication fund. In Brazil the value-added tax is grossed-up and added, along with federal sales tax, at the taxable basis. In addition, Coca-Cola FEMSA is responsible for charging and collecting the value-added tax from each of its retailers in Brazil, and 21%based on average retail prices for each state where it operates, defined primarily through a survey conducted by the government of each state, which in Argentina. 2014 represented an average taxation of approximately 9.4% over net sales.
In addition, several of the countries in which Coca-Cola FEMSA operates impose the following excise or other taxes:
Mexico imposes an excise tax of Ps. 1.00 per liter on the production, sale and importation of beverages with added sugar and HFCS as of January 1, 2014. This tax is applied only to the first sale and Coca-Cola FEMSA is responsible for charging and collecting this excise tax.
Guatemala imposes an excise tax of 0.18 cents in local currency (Ps. 0.32210.3489 as of December 31, 2011)2014) per liter of sparkling beverage.
Costa Rica imposes a specific tax on non-alcoholic bottled beverages based on the combination of packaging and flavor, currently assessed at 15.5018.35 colones (Ps. 0.41800.4955 as of December 31, 2011)2014) per 250 ml, and an excise tax on local brandscurrently assessed at 6.373 colones (approximately Ps. 0.174 as of 5%, foreign brands of 10% and mixers of 14%.December 31, 2014) per 250 ml.
Nicaragua imposes a 9%9.0% tax on consumption, and municipalities impose a 1%1.0% tax on Coca-Cola FEMSA’sour Nicaraguan gross income.
Panama imposes a 5%5.0% tax based on the cost of goods produced. Panama also imposesproduced and a 10%10.0% selective consumption tax on syrups, powders and concentrate.
Brazil imposes an average production tax of approximately 4.9% and an average sales tax of approximately 9.6%, both assessed by the federal government. Most of these taxes are fixed, based on average retail prices in each state where the company operates (VAT) or fixed by the federal government (excise and sales tax).
Argentina imposes an excise tax of 8.7% on sparkling beverages containing less than 5%5.0% lemon juice or less than 10%10.0% fruit juice, of 8.7%, and an excise tax of 4.2% on sparkling water and flavored sparkling beverages with 10%10.0% or more fruit juice, and on sparkling water of 4.2%, although this excise tax is not applicable to certainsome of Coca-Cola FEMSA’s products.
Brazil assesses an average production tax of approximately 4.8% and an average sales tax of approximately 8.8% over net sales. These taxes are fixed by the federal government based on national average retail prices obtained through surveys. The national average retail price of each product and presentation is multiplied by a fixed rate combined with specific multipliers for each presentation, to obtain a fixed tax per liter, per product and presentation. These taxes are applied only to the first sale and Coca-Cola FEMSA is responsible for charging and collecting these taxes from each of its retailers. Beginning on May 1, 2015, these federal taxes will be applied based on the price sold, as detailed in Coca-Cola FEMSA’s invoices, instead of an average retail price combined with a fixed tax rate and multiplier per presentation. Based on this new calculation, Coca-Cola FEMSA expects production tax will range between 3.2% and 4.0% and sales tax will range between 8.3% and 11.7%.
Colombia’s municipalities impose a sales tax that varies between 0.35% and 1.2% of net sales.
Venezuela’s municipalities impose a variable excise tax applied only to the first sale that varies between 0.6% and 2.5% of net sales.
Environmental Matters
In all of our territories, our operations are subject to federal and state laws and regulations relating to the protection of the environment.
Mexico
The Mexican federal authority in charge of overseeing compliance with the federal environmental laws is theSecretaria del Medio Ambiente y Recursos Naturales or Secretary of Environment and Natural Resources, which we refer to as “SEMARNAT”. An agency of SEMARNAT, theProcuraduría Federal de Protección al Ambiente or Federal Environmental Protection Agency, which we refer to as “PROFEPA”, has the authority to enforce the Mexican federal environmental laws. As part of its enforcement powers, PROFEPA can bring administrative, civil and criminal proceedings against companies and individuals that violate environmental laws, regulations and Mexican Official Standards and has the authority to impose a variety of sanctions. These sanctions may include, among other things, monetary fines, revocation of authorizations, concessions, licenses, permits or registrations, administrative arrests, seizure of contaminating equipment, and in certain cases, temporary or permanent closure of facilities. Additionally, as part of its inspection authority, PROFEPA is entitled to periodically inspect the facilities of companies whose activities are regulated by the Mexican environmental legislation and verify compliance therewith. Furthermore, in special situations or certain areas where federal jurisdiction is not applicable or appropriate, the state and municipal authorities can administer and enforce certain environmental regulations of their respective jurisdictions.
In Mexico, the principal legislation relating to environmental matters is theLey General delde Equilibrio Ecológico y la Protección al Ambiente (Federal General Law for Ecological Equilibrium and Environmental Protection, or the Mexican Environmental Law) and theLey General para la Prevención y Gestión Integral de los Residuos(General (General Law for the Prevention and Integral Management of Waste), which are enforced by theSecretaría de Medio Ambiente y Recursos Naturales(Ministry of the Environment and Natural Resources, or SEMARNAT). SEMARNAT can bring administrative and criminal proceedings against companies that violate environmental laws, and it also has the power to close non-complying facilities. Under the Mexican Environmental Law, rules have been promulgated concerning water, air and noise pollution and hazardous substances. In particular, Mexican environmental laws and regulations require that we file periodic reports with respect to air and water emissions and hazardous wastes and set forth standards for waste water discharge that apply to our operations. We are also subject to certain minimal restrictions on the operation of delivery trucks in Mexico City. We have implemented several programs designed to facilitate compliance with air, waste, noise and energy standards established by current Mexican federal and state environmental laws, including a program that installs catalytic converters and liquid petroleum gas in delivery trucks for our operations in Mexico City. See “Item 4. Information on the Company—Coca-Cola FEMSA—Total Sales and Distribution.”
In addition, we are subject to theLey de Aguas Nacionales de 1992(as amended, (the Nationalthe 1992 Water Law), enforced by theComisión Nacional del Agua(the National Water Commission). Adopted in December 1992, and amended in 2004, the National1992 Water Law provides that plants located in Mexico that use deep water wells to supply their water requirements must pay a fee to the local governments for the discharge of residual waste water to drainage. Pursuant to this law, certain local authorities test the quality of the waste water discharge and charge plants an additional fee for measurements that exceed certain standards published by the National Water Commission. In the case of non-compliance with the law, penalties, including closures, may be imposed. All of Coca-Cola FEMSA’s bottlerbottling plants located in Mexico have met these standards. In addition, Coca-Cola FEMSA’s plants in Apizaco and San Cristóbal are certified with ISO 14001.
In Coca-Cola FEMSA’s Mexican operations, it established a partnership with The Coca-Cola Company and ALPLA, a supplier of plastic bottles to Coca-Cola FEMSA in Mexico, to createIndustria Mexicana de Reciclaje (IMER), a PET recycling facility located in Toluca, Mexico. This facility started operations in 2005 and has a recycling capacity of approximately 25,000 metric tons per year from which 15,000 metric tons can be re-used in PET bottles for food packaging purposes. Coca-Cola FEMSA has also continued contributing funds to a nationwide recycling company,Ecología y Compromiso Empresarial(Environmentally (Environmentally Committed Companies). In addition, Coca-Cola FEMSA’s plants located in Toluca, Reyes, Cuautitlán, Apizaco, San Cristóbal, Morelia, Ixtacomitan, Coatepec, Poza Rica, Ojuelos, Pacífico and Cuernavaca have received or are in the process of receiving aCertificado de Industria Limpia (Certificate of Clean Industry).
As part of our environmental protection and sustainability strategies,Additionally, several of our subsidiaries have entered into 20-yearlong-term wind power supplypurchase agreements with the Mareña Renovables Wind Power Farmwind park developers in Mexico to receive electrical energy for use at production and distribution facilities of FEMSA and Coca-Cola FEMSA throughout Mexico, as well as for a significant number of OXXO convenience stores. The Mareña Renovables Wind Power Farm will be located in the state of Oaxaca and is expected to have a capacity of 396 megawatts. We anticipate the Mareña Renovables Wind Power Farm will begin operations in 2013.
Also as part of Coca-Cola FEMSA’s environmental protection and sustainability strategies, in December 2009, Coca-Cola FEMSA, jointly with strategic partners, entered into a wind energy supply agreement with a Mexican subsidiary of the Spanish wind farm developer, GAMESA Energía, S.A., or GAMESA, to supply green energy to Coca-Cola FEMSA’s bottling facility in Toluca, Mexico, owned by its subsidiary, Propimex, S. de R.L. de C.V. (formerly Propimex, S.A. de C.V.), or Propimex, and to some of its suppliers of PET bottles. The wind farm generating such energy, which is located in La Ventosa, Oaxaca, is expected to generate approximately 100 thousand megawatt hours of energy annually. The energy supply services began in April 2010 and, during 2010, provided Coca-Cola FEMSA with approximately 45 thousand megawatt hours of energy. In 2010, GAMESA sold its interest in the Mexican subsidiary that owned the wind farm to Iberdrola Renovables México, S.A. de C.V.
Central America
Coca-Cola FEMSA’s Central American operations are subject to several federal and state laws and regulations relating to the protection of the environment, which have been enacted in the last ten years, as awareness has increased in this region about the protection of the environment and the disposal of hazardous and toxic materials as well as water usage. In some countries in Central America, Coca-Cola FEMSA is in the process of bringing its operations into compliance with new environmental laws on the timeline established by the relevant regulatory authorities. Coca-Cola FEMSA’s Costa Rica and Panama operations have participated in a joint effort along with the local division of The Coca-Cola Company calledMisión Planeta (Mission Planet) for the collection and recycling of non-returnable plastic bottles.
Colombia
Coca-Cola FEMSA’s Colombian operations are subject to several Colombian federal state and municipalstate laws and regulations related to the protection of the environment and the disposal of treated water and toxic and hazardous materials. These laws include the control of atmospheric emissions, noise emissions, disposal of treated water and strict limitations on the use of chlorofluorocarbons. ForIn addition, on February 6, 2012, Colombia promulgated Decree No. 303, which requires Coca-Cola FEMSA’s plants in Colombia, it has obtained theCertificación Ambiental Fase IV (Phase IV Environmental Certificate) demonstratingFEMSA to apply for an authorization to discharge its compliance at the highest level with relevant Colombian regulations.water into public waterways. Coca-Cola FEMSA is also engaged in nationwide reforestation programs, and campaigns for the collection and recycling of glass and plastic bottles as well as reforestation programs. In 2011, jointly with the FEMSA Foundation,bottles. Coca-Cola FEMSA was awarded with the “Western Hemisphere Corporate Citizenship Award” for the social responsibility programs it carried out to respond to the extreme weather experienced in Colombia in 2010has also obtained and 2011, known locally as the “winter emergency.” In addition, Coca-Cola FEMSA also obtainedmaintained the ISO 9001, ISO-22000ISO 14001, OHSAS 18001, FSSC 22000 and PAS 220 certifications for its plants located in Medellín,Medellin, Cali, Bogotá,Bogota, Barranquilla, Bucaramanga and La Calera, as recognition for the highest quality and food harmlessness in its production processes.processes, which is evidence of its strict level of compliance with relevant Colombian regulations. Coca-Cola FEMSA’s six plants joined a small group of companies that have obtained these certifications. Coca-Cola FEMSA’s new plant located in Tocancipá commenced operations in February 2015 and Coca-Cola FEMSA expects that it will obtain the Leadership in Energy and Environmental Design (LEED) certification.
Venezuela
Coca-Cola FEMSA’s Venezuelan operations are subject to several Venezuelan federal, state and municipal laws and regulations related to the protection of the environment. The most relevant of these laws are theLey Orgánica del Ambiente (Organic Environmental Law), theLey Sobre Sustancias, Materiales y Desechos Peligrosos(Substance, Material and Dangerous Waste Law), theLey Penal del Ambiente (Criminal Environmental Law) and theLey de Aguas(Water Law). Since the enactment of the Organic Environmental Law in 1995, Coca-Cola FEMSA’s Venezuelan subsidiary has presented the proper authorities with plans to bring their production facilities and distribution centers into compliance with applicable laws, which mainly consist of building or expanding the capacity of water treatment plants in Coca-Cola FEMSA’s bottling facilities. Even though Coca-Cola FEMSA currently has had to adjust some of the originally proposed timelines due to construction delays, in 2009, Coca-Cola FEMSA completed the construction and received all the required permits to operate a new water treatment plantplants in its bottling facilityfacilities located in the city of Barcelona. At the end of 2011, Coca-Cola FEMSA constructed a new water treatment plant in its bottling plant in the city ofBarcelona, Valencia which began operations in February 2012. During 2011, Coca-Cola FEMSA also commenced construction of a new water treatment plantand in its Antimano bottling plant in Caracas which construction is expected to conclude during the second quarter of 2012.and Coca-Cola FEMSA is also concluding the process of obtaining the necessary authorizations and licenses before it can begin the construction and expansion of its current water treatment plant in its bottling facility in Maracaibo.Maracaibo, which is expected to commence operations in the fourth quarter of 2015. In December 2011, Coca-Cola FEMSA also obtained the ISO 14000 certification for all of its plants in Venezuela.
In addition, in December 2010, the Venezuelan government approved theLey Integral de Gestión de la Basura (Comprehensive Waste Management Law), which will regulateregulates solid waste management and which may be applicable to manufacturers of products for mass consumption. The full scope of this law has not yet been established.
Brazil
Coca-Cola FEMSA’s Brazilian operations are subject to several federal, state and municipal laws and regulations related to the protection of the environment. Among the most relevant laws and regulations are those dealing with the emission of toxic and hazardous gases, disposal of wastewater and solid waste, and soil contamination by hazardous chemicals, which impose penalties, such as fines, facility closures or criminal charges depending upon the level of non-compliance.
Coca-Cola FEMSA’s production plant located in Jundiaí has been recognized by the Brazilian authorities for its compliance with environmental regulations and for having standards well above those imposed by the law. The plant of Jundiaí has been certified for:for GAO-Q and GAO-E. In addition, the plants of Jundiaí, Mogi das Cruzes, Campo Grande, Marília, Maringá, Curitiba and Bauru have been certified for (i) ISO 9001 since 1993;9001: 2008; (ii) ISO 14001 since March 1997;14001: 2004 and; (iii) norm OHSAS 18001 since 2005; (iv) ISO 22000 since 2007;18001: 2007. In 2012, the Jundiaí, Campo Grande, Bauru, Marília, Curitiba, Maringá, Porto Real and (v) PAS: 96 since 2010.
In Brazil it is also necessary to obtain concessions from the government to cast drainage. Coca-Cola FEMSA’s plants in Brazil have been granted this concession, except Mogi das Cruzes where it has timely begun the process of obtaining one. In December, 2010, Coca-Cola FEMSA increased the capacity of the water treatment plantplants were certified in its Jundiaí facility.standard FSSC22000.
In Brazil, a municipal regulation of the City of São Paulo, implemented pursuant to Law 13.316/2002, came into effect in May 2008. This regulation requires Coca-Cola FEMSA to collect for recycling a specified annual percentage of plastic bottles made from PET sold in the City of São Paulo; such percentage increases each year. As ofBeginning in May 2009,2011, Coca-Cola FEMSA was required to collect for recycling 50%90% of the PET bottles it sold in the Citycity of São Paulo. As of May 2010, it was required to collect 75%, and as of May 2011, it was required to collect 90%.Paulo for recycling. Currently, Coca-Cola FEMSA is not able to collect the entire required volume of PET bottles it has sold in the City of São Paulo for recycling. IfSince Coca-Cola FEMSA does not meet the requirements of this regulation, which we believe to be more onerous than those imposed by the countries with the highest recycling standards, it could be fined and be subject to other sanctions, such as the suspension of operations in any of its plants and/or distribution centers located in the City of São Paulo. In May 2008, Coca-Cola FEMSA, together with other bottlers in the city of São Paulo, through theAssociação Brasileira das Indústrias de Refrigerantes e de Bebidas Não-alcoólicas (Brazilian Soft Drink and Non-Alcoholic Beverage Association, or ABIR), filed a motion requesting a court to overturn this regulation ondue to the basis of impossibility of compliance. In addition, in November 2009, in response to a requirement of the municipal authority request for Coca-Cola FEMSA to demonstrate the destination of the PET bottles sold by it in the City of São Paulo, Coca-Cola FEMSA filed a motion showing all of its recycling programs and requesting a more practical timeline to comply with the requirements of the law. In October 2010, the municipal authority of the City of São Paulo levied a fine on Coca-Cola FEMSA’s Brazilian operating subsidiary of 250,000 Brazilian reais (approximately Ps. 1,750,0001.4 million as of December 31, 2010)2014) on the grounds that the report submitted by Coca-Cola FEMSA’s Brazilian operating subsidiary did not comply with the 75% proper disposal requirement for the period from May 2008 to May 2010. Coca-Cola FEMSA filed an appeal against this fine.fine, which was denied by the municipal authority in May 2013, and the administrative stage is therefore closed. Coca-Cola FEMSA is currently evaluating next steps. In July 2012, the State Appellate Court of São Paulo rendered a decision admitting an interlocutory appeal filed on behalf of ABIR suspending the fines and other sanctions to ABIR’s associated companies, including Coca-Cola FEMSA’s Brazilian subsidiary, for alleged noncompliance with the recycling municipal regulation up to the final resolution of the lawsuit. Coca-Cola FEMSA is currently awaiting final resolution of both matters.the lawsuit filed on behalf of ABIR. We cannot assure you that these measures will have the desired effect or that Coca-Cola FEMSA will prevail in its judicial challenge.
In August 2010, Law No. 12.305/2010 established the Brazilian National Solid Waste Policy. This policy is based on the principle of shared responsibility between the government, companies and the public, and provides for the post-consumption return of products to companies and requires public authorities to implement waste management programs. This law is regulated by Federal Decree No. 7.404/2010, and was published in December 2010. In response to the Brazilian National Solid Waste Policy, in December 2012, a proposal was provided to the Ministry of the Environment by almost 30 associations involved in the packaging sector, including ABIR in its capacity as representative for The Coca-Cola Company, Coca-Cola FEMSA’s Brazilian subsidiary, and other bottlers. The proposal involved creating a “coalition” to implement systems for reverse logistics packaging non-dangerous waste that makes up the dry portion of municipal solid waste or its equivalent. The goal of the proposal is to create methodologies for sustainable development, and protect the environment, society, and the economy. Coca-Cola FEMSA is currently discussing withawaiting a final resolution from the relevant authorities the impact this law may have on Brazilian companies in complying with the regulation in effect in the CityMinistry of São Paulo.Environment, which it expect to receive during 2015.
Argentina
Coca-Cola FEMSA’s Argentine operations are subject to federal and municipal laws and regulations relating to the protection of the environment. The most significant of these are regulations concerning waste water discharge, which are enforced by theSecretaría de Ambiente y Desarrollo Sustentable(Ministry (Ministry of Natural Resources and Sustainable Development) and theOrganismo Provincial para el Desarrollo Sostenible(Provincial (Provincial Organization for Sustainable Development) for the province of Buenos Aires. Coca-Cola FEMSA’s Alcorta plant is in compliance with environmental standards and Coca-Cola FEMSA has been certified for ISO 14001:2004 for its plants and operative units in Buenos Aires.
For all of Coca-Cola FEMSA’s plant operations, it employs an environmental management system:Sistema de Administración Ambiental (Environmental Administration System, or EKOSYSTEM) that is contained withinSistema Integral de Calidad (Integral Quality System, or SICKOF).
Coca-Cola FEMSA has expended, and may be required to expend in the future, funds for compliance with and remediation under local environmental laws and regulations. Currently, we do not believe that such costs will have a material adverse effect on Coca-Cola FEMSA’s results from operations, or financial condition. However, since environmental laws and regulations and their enforcement are becoming increasingly more stringent in Coca-Cola FEMSA’s territories, and there is increased recognition by local authorities of the need for higher environmental standards in the countries where it operates, changes in current regulations may result in an increase in costs, which may have an adverse effect on Coca-Cola FEMSA’s future results from operations or financial condition. Coca-Cola FEMSA’s managementFEMSA is not aware of any significant pending regulatory changes that would require a significant amount of additional remedial capital expenditures.
We do not believe that Coca-Cola FEMSA’s business activities pose a material risk to the environment, and we believe that Coca-Cola FEMSA is in material compliance with all applicable environmental laws and regulations.
Other regulationsRegulations
In December 2009, the Venezuelan government issued a decree requiring a reduction in energy consumption by at least 20% for industrial companies whose consumption is greater than two megawatts per hour and to submit an energy-usage reduction plan. Some of Coca-Cola FEMSA’s bottling operations in Venezuela outside of Caracas met this threshold and it submitted a plan, which included the purchase of generators for its plants. In January 2010, the Venezuelan government subsequently implemented power cuts and other measures for all industries in Caracas whose consumption was above 35 kilowatts per hour.
In 2011, Coca-Cola FEMSA installed electrical generators in its Antimano, Barcelona, Maracaibo and Valencia bottling facilities to mitigate any such risks and filed the respective energy usage reduction plans with the authorities. In addition, since January 2010, the Venezuelan government amendedhas implemented power cuts and other measures for all industries in Caracas whose consumption is above 35 kilowatts per hour and continues to do so.
In August 2010, the DefenseMexican government approved a decree which regulated the sale of food and Access to Goodsbeverages by elementary and Services Law. Any violationmiddle schools. In May 2014, the decree was replaced by a companynew decree that produces, distributesestablishes mandatory guidelines applicable to the entire national education system (from elementary school through college). According to the decree, the sale of specific sparkling beverages and sells goodsstill beverages that contain sugar or HFCS by schools is prohibited. Schools are still allowed to sell water and services could lead to fines, penalties or the confiscation of the assets used to produce, distributecertain still beverages, such as juices and sell these goods without compensation. Although we believe Coca-Cola FEMSA is in compliance with this law, consumer protection laws in Venezuela are subject to continuing review and changes.
In July 2011, the Venezuelan government passed the Fair Costs and Prices Law. The purpose of this law is to establish the regulations and administrative processes necessary to maintain the price stability of, and equal access to, goods and services. The law also creates the National Ministry of Costs and Prices, whose main role is to oversee price controls and set maximum retail prices on certain consumer goods and services. Of Coca-Cola FEMSA’s products, only certain of its still waterjuice-based beverages, were affected by these regulations, which mandated a lowering of its sale prices as of April 2012. Any failure tothat comply with this law would resultthe guidelines established in fines, temporary suspension or the closure of operations. While Coca-Cola FEMSA is presently in compliance with this law, wesuch decree. We cannot assure you that the Venezuelan government’s future regulation of goods and servicesMexican government will not result in a forced reductionfurther restrict sales of prices in respect of certainother of Coca-Cola FEMSA’s other products whichby such schools. These restrictions and any further restrictions could have a negative effectan adverse impact on itsCoca-Cola FEMSA’s results of operations.
In January 2012, the Costa Rican government approved a decree thatwhich regulates the sale of food and beverages in public schools. The decree came into effect in 2012. Enforcement of this law will be gradual, from applicability in 2012According to 2014, depending on the specific characteristics of the food or beverage in question. In accordance with the decree, the sale of specific sparkling beverages and still beverages that contain sugar, syrup or HFCS in any type of presentation in schools is prohibited. Coca-Cola FEMSA willis still be allowed to sell water and certain still beverages in schools. WeIn December 2014, the Costa Rican government announced that it will be stricter in the enforcement of this decree. Although Coca-Cola FEMSA is in compliance with this law, we cannot assure you that the Costa Rican government will not further restrict sales of other of Coca-Cola FEMSA’s products in schools in the future; these restrictions and any such further restrictions could lead tohave an adverse impact on Coca-Cola FEMSA’s results of operations.
In May 2012, the Venezuelan government adopted significant changes to labor regulations. This amendment to Venezuela’s labor regulations had a negative impact on Coca-Cola FEMSA’s business and operations. The principal changes that impacted Coca-Cola FEMSA’s operations are: (i) the requirement that employee terminations are now subject to governmental authorization; (ii) retroactive assessments for any modifications to Coca-Cola FEMSA’s severance payment system; (iii) a reduction in the maximum daily and weekly working hours (from 44 to 40 weekly); (iv) an increase in mandatory weekly breaks, prohibiting a reduction in salaries as a result of such increase; and (v) the requirement that all third party contractors participating in the manufacturing and sales processes of Coca-Cola FEMSA’s products be included in its payroll by no later than May 2015. Coca-Cola FEMSA is currently in compliance with these labor regulations and expects to include all third party contractors to its payroll by the imposed deadline.
In November 2014, the Venezuelan government amended the Foreign Investment Law. As part of the amendments made, the law now provides that at least 75% of the value of foreign investment must be comprised of assets located in Venezuela, which may include equipment, supplies or other goods or tangible assets required at the early stages of operations. By the end of the first fiscal year after commencement of operations in Venezuela, investors will be authorized to repatriate up to 80% of the profits derived from their investment. Any profits not otherwise repatriated in a fiscal year, may be accumulated and be repatriated the following fiscal year, together with profits generated during such year. In the event of liquidation, a company may repatriate up to 85% of the value of the foreign investment. Currently, the scope of this law is not entirely clear with respect to the liquidation process.
In September 2012, the Brazilian government issued Law No. 12,619 (Law of Professional Drivers), which regulates the working hours of professional drivers who distribute Coca-Cola FEMSA’s products from its plants to the distribution centers and to retailers and points of sale. Pursuant to this law, employers must keep a record of working hours, including overtime hours, of professional drivers in a reliable manner, such as electronic logbooks or worksheets. Coca-Cola FEMSA is currently in compliance with this law as we follow all these requirements.
In June 2014, the Brazilian government issued Law No. 12,997 (Law of Motorcycle Drivers) which imposes a risk premium of 30% of the base salary payable to all employees who drive motorcycles in their job. This risk premium became enforceable in October 2014, when the related rules and regulations were issued by the Ministry of Labor and Employment. Coca-Cola FEMSA believes that these rules and regulations were unduly issued by such Ministry since it did not comply with all the essential requirements established in Law No. 12,997. In November 2014, Coca-Cola FEMSA, in conjunction with other bottlers of the Coca-Cola system in Brazil and through the ABIR, filed an action against the Ministry of Labor and Employment to suspend the effects of such law. ABIR’s associated companies, including Coca-Cola FEMSA’s Brazilian subsidiary, were issued a preliminary injunction suspending the effects of the law and exempting us from paying the risk premium. We cannot assure you that the Brazilian government will not appeal the injunction with the competent courts in Brazil in order to restore the effects of Law No. 12,997.
In June 2013, following a comprehensive amendment to the Mexican Constitution, a new antitrust authority with autonomy was created: the CFCE. As a result of these amendments, new antitrust and telecommunications specialized courts were created and commenced hearing cases in August 2013. In July 2014, a new federal antitrust law came into effect based on the amended constitutional provisions. As part of these amendments, two new relative monopolistic practices were included: reductions in margins between prices to access essential raw materials and end-user prices of such raw materials and limitation or restriction on access to essential raw materials or supplies. Furthermore, the ability to close a merger or acquisition without antitrust clearance from the CFCE was eliminated. The regular waiting period for authorization has been extended to 60 business days. We cannot assure you that these new amendments and the creation of new governmental bodies and courts will not have an adverse effect on our business or our inorganic growth plans.
In 2013, the government of Argentina imposed a withholding tax at a rate of 10% on dividends paid by Argentine companies to non-Argentine holders. Similarly, in 2013, the government of Costa Rica repealed a tax exemption on dividends paid to Mexican residents. Future dividends will be subject to withholding tax at a rate of 15%.
In January 2014, a new Anti-Corruption Law in Brazil came into effect, which regulates bribery, corruption practices and fraud in connection with agreements entered into with governmental agencies. The main purpose of this law is to impose liability on companies carrying out such practices, establishing fines that can reach up to 20% of a company’s gross revenues in the previous fiscal year. Although Coca-Cola FEMSA believes it is in compliance with this law, if it was found liable for any of these practices, this law would have an adverse effect on its business.
Water Supply Law
In Mexico, Coca-Cola FEMSA obtains water directly from municipal utility companies and pumps water from its own wells and rivers pursuant to concessions obtained from the Mexican government on a plant-by-plant basis. Water use in Mexico is regulated primarily by the National1992 Water Law, and regulations issued thereunder, which created the National Water Commission. The National Water Commission is in charge of overseeing the national system of water use. Under the National1992 Water Law, concessions for the use of a specific volume of
ground or surface water generally run from five- to fifty-year terms, depending on the supply of groundwater in each region as projected by the National Water Commission. Concessionaires may request that concession terms be extended before expiration.they expire. The Mexican government is authorized to reduce the volume of ground or surface water granted for use by a concession by whatever volume of water that is not used by the concessionaire for two consecutive years. However, because the current concessions for each of Coca-Cola FEMSA’s plants in Mexico do not match each plant’s projected needs for water in future years, we successfully negotiated with the Mexican government the right to transfer the unused volume under concessions from certain plants to other plants anticipating greater water usage in the future. These concessions may be terminated if, among other things, we use more water than permitted or we fail to pay required concession-related fees and do not cure such situations in a timely manner.
Although we have not undertaken independent studies to confirm the sufficiency of the existing or future groundwater supply, we believe that our existing concessions satisfy our current water requirements in Mexico.
In Argentina, a state water company provides water to Coca-Cola FEMSA’s Alcorta plant on a limited basis; however, we believe the authorized amount meets Coca-Cola FEMSA’s requirements for this plant. In Coca-Cola FEMSA’s Monte Grande plant in Argentina, it pumps water from its own wells, in accordance with Law 25.688.
In Brazil, we buyCoca-Cola FEMSA buys water directly from municipal utility companies and we also capture water from underground sources, wells or surface sources (i.e.(i.e., rivers), pursuant to concessions granted by the Brazilian government for each plant. According to the Brazilian Constitution, water is considered an asset of common use and can only be exploited for the national interest by Brazilians or companies formed under Brazilian law. Concessionaires and users have the responsibility for any damage to the environment. The exploitation and use of water is regulated by theCódigo de Mineração (Code of Mining, Decree Law No. 227/67), theCódigo de Águas Minerais (Mineral Water Code, Decree Law No. 7841/45), the National Water Resources Policy (Law No. 9433/97) and by regulations issued thereunder. The companies that exploit water are supervised by theDepartamento Nacional de Produção Mineiral—DNPM (National Department of Mineral Production) and the National Water Agency in connection with federal health agencies, as well as state and municipal authorities. In Coca-Cola FEMSA’s Jundiaí, Marília, Curitiba, Maringá, Porto Real and Belo Horizonte plants, we doit does not exploit mineralspring water. In theits Mogi das Cruzes, Bauru and Campo Grande plants, we haveit has all the necessary permits related for the exploitation of mineralspring water.
In Argentina, a state water company provides water to Coca-Cola FEMSA’s Alcorta plant on a limited basis; however, we believe the authorized amount meets Coca-Cola FEMSA’s requirements for this plant. In Coca-Cola FEMSA’s Monte Grande plant in Argentina, it pumps water from its own wells, in accordance with Law 25.688.
In Colombia, in addition to natural spring water, Coca-Cola FEMSA obtains water directly from its own wells and from utility companies. Coca-Cola FEMSA is required to have a specific concession to exploit water from natural sources. Water use in Colombia is regulated by lawLaw No. 9 of 1979 and decrees no.Decrees No. 1594 of 1984 and no.No. 2811 of 1974. In addition, on February 6, 2012, Colombia promulgated Decree No. 303, which requires Coca-Cola FEMSA to apply for water concessions and for authorization to discharge its water into public waterways. The National Institute of National Resources supervises companies that exploit water.use water as a raw material for their business.
In Nicaragua, the use of water is regulated by theLey General de Aguas Nacionales (National Water Law), and inCoca-Cola FEMSA obtains water directly from its own wells. In Costa Rica, the use of water is regulated by theLey de Aguas (Water Law). In both of these countries, Coca-Cola FEMSA owns and exploits its own water wells granted to it through governmental concessions. In Guatemala, no license or permits are required to exploit water from the private wells in Coca-Cola FEMSA’s own plants. In Panama, Coca-Cola FEMSA acquires water from a state water company, and the use of water is regulated by theReglamento de Uso de Aguas de Panamá(Panama (Panama Use of Water Regulation). In Venezuela, Coca-Cola FEMSA uses private wells in addition to water provided by the municipalities, and it has taken the appropriate actions, including actions to comply with water regulations, to have water supply available from these sources, regulated by theLey de Aguas (Water Law).
In addition, Coca-Cola FEMSA obtains water for the production of some of its natural spring water products, such asManantialin Colombia and Crystal in Brazil, from spring water pursuant to concessions granted.
We cannot assure you that water will be available in sufficient quantities to meet ourCoca-Cola FEMSA’s future production needs, that weit will be able to maintain ourits current concessions or that additional regulations relating to water use will not be adopted in the future in ourits territories. We believe that we are in material compliance with the terms of our existing water concessions and that we are in compliance with all relevant water regulations.
ITEM 4A. | UNRESOLVED STAFF COMMENTS |
None
ITEM 5. | OPERATING AND FINANCIAL REVIEW AND PROSPECTS |
The following discussion should be read in conjunction with, and is entirely qualified by reference to, our audited consolidated financial statements and the notes to those financial statements. Our audited consolidated financial statements were prepared in accordance with Mexican FRS, which differ in certain significant respects from U.S. GAAP. Notes 26 and 27 to our audited consolidated financial statements provide a description ofIFRS as issued by the principal differences between Mexican FRS and U.S. GAAP as they relate to us, as well as U.S. GAAP consolidated balance sheets, statements of income and comprehensive income, and cash flows for the same periods presented for Mexican FRS purposes and for the consolidated statement of changes in stockholders’ equity for the years ended December 31, 2010 and 2011, and reconciliation to U.S. GAAP of net income, comprehensive income and stockholders’ equity. See “—U.S. GAAP Reconciliation.”IASB.
Overview of Events, Trends and Uncertainties
Management currently considers the following events, trends and uncertainties to be important to understanding its results from operations and financial position during the periods discussed in this section:
• | Coca-Cola |
FEMSA Comercio accelerated its ratehas maintained high rates of OXXO store openings and continues to grow in terms of total revenues and as a percentage of our consolidated total revenues. FEMSA Comercio has lower operating margins than our beverage business. Given that FEMSA Comercio has lower operating margins and given its fixed costs,cost structure, it is more sensitive to changes in sales which could negatively affect operating margins. In addition, the integration of the new small-format retail businesses could also affect margins at the FEMSA Comercio level, given that these businesses have lower margins than the OXXO business.
Our consolidated results of operations are also significantly affected by the performance of the Heineken Group, as a result of our 20% economic interest. Our consolidated net income for 2014 included Ps. 5,244 million related to our non-controlling interest in the Heineken Group, as compared to Ps. 4,587 for 2013.
Our results from operations and financial position are affected by the economic and market conditions in the countries where our subsidiaries conduct their operations, particularly in Mexico. Changes in these conditions are influenced by a number of factors, including those discussed in “Item“Item 3. Key Information—Risk Factors.”
OnIn February 2015, the Venezuelan government eliminated the SICAD II exchange rate system. As of December 15, 2011, Coca-Cola FEMSA entered31, 2014, the last day the SICAD II exchange rate was available, the SICAD II exchange rate was 49.99 bolivars to US$ 1.00. We decided to use this SICAD II exchange rate to translate our results for the fourth quarter and the full year 2014 into an agreement to merge the beverage division of Grupo Fomento Queretano into Coca-Cola FEMSA. Grupo Fomento Queretano’s beverage division operates mainly inour reporting currency, the Mexican statepeso. As a result, we recognized a reduction in equity of Querétaro,Ps. 11,836 million as wellof December 31, 2014 based on the valuation of our net investment in Venezuela at the SICAD II exchange rate of 49.99 bolivars per U.S. dollar. As of December 31, 2014, our foreign direct investment in Venezuela was Ps. 4,015 million, using the SICAD II exchange rate of 49.99 bolivars per US$ 1.00.
As of February 2015, there are three exchange rates in Venezuela. The official rate of 6.30 bolivars per U.S. dollar rate, the exchange rate determined by the state-run system known as SICAD, and a new exchange rate determined by the state-run system known as SIMADI. The SICAD determines the exchange rates based on limited periodic sales of U.S. dollars through auctions. The SIMADI determines the exchange rates based on supply and demand of U.S. dollars. The SICAD and SIMADI exchange rates in partseffect as of April 17, 2015, were 12.00 and 196.66 bolivars per US$ 1.00, respectively. The Venezuelan government has established that imports of certain of our raw materials into Venezuela qualify as transactions that may be settled using the statesofficial exchange rate of Mexico, Hidalgo and Guanajuato. The merger agreement was approved by both Coca-Cola6.30 bolivars per US$ 1.00. To the extent that imports of these raw materials continue to be so qualified, we will continue to account for these transactions using the official exchange rate. However, we will continue to monitor any changes that may effect the applicable exchange rate that we use to settle imports of our raw materials into Venezuela.
In November 2014, we announced that Federico Reyes Garcia, FEMSA’s and Grupo Fomento Queretano’sVice President of Corporate Development, would retire on April 1, 2015. Mr. Reyes Garcia will remain on the boards of directors and is subject to the approvalFinance Committees of the CFCFEMSA and Coca-Cola FEMSA. Javier Astaburuaga Sanjines, FEMSA’s Chief Financial and Corporate Officer, replaced Mr. Reyes Garcia as Vice President of the shareholders meetings of both companies. The transaction will involve the issuance of approximately 45.1 millionCorporate Development. From his new Coca-Cola FEMSA Series L Shares, and in addition Coca-Cola FEMSA will assume Ps. 1,221 million in net debt. This transaction is expected to be completed in the second quarter of 2012.
In February 2012, Coca-Cola FEMSA announced that it had entered into a 12-month exclusivity agreement with The Coca-Cola Company to evaluate the potential acquisition by Coca-Cola FEMSA of a controlling ownership stake in the bottling operations owned by The Coca-Cola Company in the Philippines. Both parties believe that Coca-Cola FEMSA’s expertise and successful track record operating in fragmented markets and emerging economies could be effectively deployed in such territory, and contribute significantly toward expanding the penetration of, and consumer preference for, The Coca-Cola Company’s brands in that market. This exclusivity agreement does not require either party to enter into any transaction, and there can be no assurances that a definitive agreementposition, Mr. Astaburuaga Sanjines will be executed.
On February 23, 2012, a wholly-owned subsidiaryclosely involved in FEMSA’s strategic and M&A-related processes, and he will also continue to serve on the boards of Mitsubishi Corporation, and Stichting Depositary PGGM Infrastructure Funds, a pension fund managed by PGGM, acquired the 45% interest held by FEMSA in the parent companies of the Mareña Renovables Wind Power Farm, a 396 megawatt late-stage wind energy project in
the southeastern region of the State of Oaxaca. Certain subsidiariesdirectors of FEMSA FEMSA Comercio and Coca-Cola FEMSA, have entered into 20-year wind power supply agreements withas well as on the Mareña Renovables Wind Power Farm to purchase energy output produced by it. These agreements will remain in full force and effect. The sale of FEMSA’s participation as an investor will result in a gain.
Changes in Mexican Financial Reporting Standards
Adoption of International Financial Reporting Standards for public companies
The CNBV has announced that, commencing in 2012, all Mexican public companies must report their financial information in accordance with IFRS. Since 2006, theConsejo Mexicano para la Investigación y Desarrollo de Normas de Información Financiera (Mexican Board of Research and Development of Financial Reporting Standards) has been modifying Mexican FRS in order to ensure their convergence with IFRS. Starting onHeineken Supervisory Board. Effective January 1, 2012, we are reporting our financial information in accordance with IFRS2015, Daniel Alberto Rodríguez Cofré joined FEMSA and will present financial information for 2011 on a comparable basis.April 1, 2015 he replaced Mr. Astaburuaga Sanjines as Chief Financial and Corporate Officer, and he also serves on the boards of directors of FEMSA and Coca-Cola FEMSA.
Effects of Changes in Economic Conditions
Our results from operations are affected by changes in economic conditions in Mexico, Brazil and in the other countries in which we operate. For the years ended December 31, 2011, 2010,2014, 2013, and 2009, 60%2012, 68%, 62%,63% and 59%62%, respectively, of our total sales were attributable to Mexico. As a result, we have significant exposure to the economic conditions of certain countries, particularly those in Central America, Colombia, Venezuela, Brazil and Brazil,Argentina, although we continue to generate a substantial portion of our total sales from Mexico. TheOther than Venezuela, the participation of these other countries as a percentage of our total sales has not changed significantly during the last five years and is expected to increase in future periods due to acquisitions.years.
The Mexican economy is gradually recovering from a downturn as a result of the impact of the global financial crisis on many emerging economies in 2009. In 2011,According to INEGI, Mexican GDP expanded by 2.1% in 2014 and by approximately 3.9% compared to an expansion of 5.4% for the full year of 2010, according to INEGI.1.4% and 4.0% in 2013 and 2012, respectively. According to the Banco Nacional de México survey regarding the economic expectations of specialists, Mexican GDP is expected to increase by 3.43%3.08% in 2012,2015, as of the latest estimate, published on April 2, 2012.March 5, 2015. The Mexican economy continues to be heavily influenced by the U.S. economy, and therefore, further deterioration in economic conditions in, or delays in the recovery of, the U.S. economy may hinder any recovery in Mexico.
Our future results may be significantlyare affected by the general economic and financial conditions in the countries where we operate, including by levelsconduct operations. Most of economic growth,these economies continue to be heavily influenced by the devaluationU.S. economy, and therefore, deterioration in economic conditions in the U.S. economy may affect these economies. Deterioration or prolonged periods of weak economic conditions in the countries where we conduct operations may have, and in the past have had, a negative effect on our company and a material adverse effect on our results and financial condition. Our business may also be significantly affected by the interest rates, inflation rates and exchange rates of the local currency, bycurrencies of the countries in which we operate. Decreases in growth rates, periods of negative growth and/or increases in inflation and highor interest rates or by political developments, and may result in lower demand for our products, lower real pricing of our products or a shift to lower margin products. Because a large percentage of our costs are fixed costs, we may not be able to reduce such costs and expenses, and our profit margins may suffer as a result of downturns in the economy of each country.
The decreaseIn addition, an increase in interest rates in Mexico in 2011 decreases ourwould increase the cost to us of Mexican peso-denominated variable interest rate indebtedness and couldfunding, which would have a favorablean adverse effect on our financial position and results of operations during 2012.position.
Beginning in the fourth quarter of 20092012 and through 2011,2014, the exchange rate between the Mexican peso and the U.S. dollar fluctuated from a low of Ps. 11.5111.98 per U.S. dollar, to a high of Ps. 14.2514.79 per U.S. dollar. At December 30, 2011,31, 2014, the exchange rate (noon buying rate) was Ps. 13.951014.75 to US$ 1.00. On March 30, 2012,April 17, 2015, the exchange rate was Ps. 12.811515.3190 to US$ 1.00.See “Item 3. Key Information—Exchange Rate Information.” A depreciation of the Mexican peso or local currencies in the countries in which we operate relative to the U.S. dollar increases our cost of raw materials priced in U.S. dollars, including raw materials whose prices are set with reference to the U.S. dollar. In addition, a depreciation of the Mexican peso or local currencies in the countries in which we operate relative to the U.S. dollar will increase our U.S. dollar-denominated debt obligations, which could negatively affect our financial position and results from operations.results. However, this effect could be offset by a corresponding appreciation of our U.S. dollar denominated cash position.
Companies with structural characteristics that result in margin expansion in excess of sales growth are referred to as having high “operating leverage.”
The operating subsidiaries of Coca-Cola FEMSA are engaged, to varying degrees, in capital-intensive activities. The high utilization of the installed capacity of the production facilities results in better fixed cost absorption, as increased output results in higher revenues without additional fixed costs. Absent significant increases in variable costs, gross profit margins will expand when production facilities are operated at higher utilization rates. Alternatively, higher fixed costs will result in lower gross profit margins in periods of lower output.
In addition, the commercial operations of Coca-Cola FEMSA are carried out through extensive distribution networks, the principal fixed assets of which are warehouses and trucks and are designed to handle large volumes of beverages. Fixed costs represent an important proportion of the total distribution expense of Coca-Cola FEMSA. Generally, the higher the volume that passes through the distribution system, the lower the fixed distribution cost as a percentage of the corresponding revenues. As a result, operating margins improve when the distribution capacity is operated at higher utilization rates. Alternatively, periods of decreased utilization because of lower volumes will negatively affect our operating margins.
FEMSA Comercio operations result in a low margin business with relatively fixed costs. These two characteristics make FEMSA Comercio a business with an operating margin that might be affected more easily by a change in sales levels.
Critical Accounting Judgments and Estimates
The preparationIn the application of our accounting policies, which are described in Note 2.3 to our audited consolidated financial statements, requires that wemanagement is required to make judgments, estimates and assumptions that affect (1)about the reportedcarrying amounts of our assets and liabilities (2) the disclosure of our contingent liabilities at the date of the financial statements and (3) the reported amounts of revenues and expenses during the reporting period. We base ourthat are not readily apparent from other sources. The estimates and judgmentsassociated assumptions are based on our historical experience and on various other reasonable factors that together form the basis for making judgments about the carrying values of our assets and liabilities. Our actualare considered to be relevant. Actual results may differ from these estimates under different assumptions or conditions. We evaluate ourestimates. The estimates and judgmentsunderlying assumptions are reviewed on an on-goingongoing basis. Our significantRevisions to accounting policiesestimates are describedrecognized in Note 4 to our audited consolidated financial statements. We believe our most critical accounting policiesthe period in which the estimate is revised if the revision affects only that implyperiod or in the applicationperiod of estimates and/or judgmentsthe revision and future periods if the revision affects both current and future periods.
The following are the following:key assumptions concerning the future and other key sources of estimation uncertainty at the end of the reporting period that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year. Existing circumstances and assumptions about future developments, however, may change due to market changes or circumstances arising beyond our control. Such changes are reflected in the assumptions when they occur.
Property, plantImpairment of indefinite lived intangible assets, goodwill and equipment
Property, plant and equipment are depreciated over their estimated useful lives. The estimated useful lives are reviewed annually and represent the period we expect the assets to remain in service and to generate revenues. We base our estimates on the experience of our technical personnel. Depreciation is computed using the straight line method of accounting.
Where an item of property, plant and equipment is comprised of major components having different useful lives, these components are accounted for and depreciated as separate items (major components) of property, plant and equipment.
Imported assets are recorded using the exchange rate as of the acquisition date and are restated using the inflation factor of the country where the asset is acquired for inflationary economic environments.
We test depreciable long-lived assets for
Intangible assets with indefinite lives including goodwill are subject to annual impairment attests. Impairment exists when the carrying value of an asset or cash generating unit (CGU) exceeds its recoverable amount, which is the higher of its fair value when there are indicatorsless costs to sell and its value in use. The fair value less costs to sell calculation is based on available data from binding sales transactions in arm’s length transactions of impairment and determine whether impairment exists, by first comparing the book valuesimilar assets or observable market prices less incremental costs for disposing of the assets with their recoverable value based on undiscounted cash flows, and ifasset. In order to determine whether such assets are not recoverable, then with their fairimpaired, we initially calculate an estimation of the value in use of the cash-generating units to which is calculated considering their operating conditions andsuch assets have been allocated. The value in use calculation requires management to estimate the future cash flows expected to be generated based on their estimated remaining useful life as determined by management.
Returnable and non-returnable bottles are aggregated as part of property, plant and equipment. Returnable bottles are depreciated based on the straight-line method over acquisition cost. Coca-Cola FEMSA estimates depreciation rates considering returnable bottles useful lives.
We recorded returnable bottles and cases at acquisition cost and restated them applying inflation factors only when they form part of our operations in countries with an inflationary economic environment. For Coca-Cola FEMSA, breakage is expensed as it is incurred as part of depreciation. The annual calculated depreciation expense has been similar to the annual bottle breakage expense. Whenever we decide to discontinue a particular returnable presentation and retire itarise from the market, we write off the discontinued presentation through an increasecash-generating unit and a suitable discount rate in breakage expense presented as part of depreciation.
Valuation and impairment of intangible assets and goodwill
We identify all intangible assets associated with business acquisitions and investments in shares. We separate intangible assets between those with a finite useful life and those with an indefinite useful life, in accordance with the period over which we expectorder to receive the benefits. Intangible assets and goodwill identified in investments in shares are presented within the total investment in shares.
The intangible assets of indefinite life associated with business acquisitions are subject to annual impairment tests. As of December 31, 2011, we have recorded intangible assets with indefinite lives, which consist of:
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Goodwill relating to Coca-Cola FEMSA acquisitions during 2011 that amounted to Ps. 5,214; and
Other intangible assets with indefinite lives that amounted to Ps. 343 million.
calculate present value. We review annually the carrying value of our intangible assets with indefinite lives and goodwill for impairment based on recognized valuation techniques. While we believe that our estimates are reasonable, different assumptions regarding such estimates could materially affect our evaluations.
Investments Impairment losses are recognized in shares, including related goodwill, are subject to impairments testing whenever certain events or changes in circumstances occur that indicate that the carrying amount may exceed fair value. We recognize an impairment loss when it is considered to be other than a temporary loss. As of December 31, 2011, identified intangible assets and goodwill relating to our 20% economic interestcurrent earnings in the Heineken Group amounted to €3,055 million (approximately US$ 3,940 million) and €1,200 million (approximately US$ 1,548 million), respectively.
Following our evaluations during 2011 and up toperiod the date of this annual report, we do not have information which leads to a significantrelated impairment of intangible assets with indefinite lives or of our investments in shares of affiliated companies. We can give no assurance that our expectations will not change as a result of new information or developments. Future changes in economic or political conditions in any country in which we operate or in the industries in which we participate may cause us to change our current assessment.
Employee benefits
Our employee benefits are comprised of obligations for pension plan, seniority premium, post-retirement medical services and severance indemnities.is determined. The determination of our obligations and expenses for pension and other post-retirement benefits are determined by actuarial calculations and are dependent on our determination of certainkey assumptions used to estimate such amounts. We evaluatedetermine the recoverable amount for our assumptions at least annually.
While we believe that our assumptionsCGUs, including a sensitivity analysis, are appropriate, significant differencesfurther explained in our actual experience or significant changes in our assumptions may materially affect our pensionNotes 3.16 and other post-retirement obligations and our future expense. The following table is a summary of the three key assumptions to be used in determining 2011 annual labor liability expense, along with the impact on this expense of a 1% change in each assumed rate.
Nominal Rates(3) | Real Rates(4) | Impact of Rate Changes(2) | ||||||||||||||||||||||||||||||
Assumptions 2011(1) | 2011 | 2010 | 2009 | 2011 | 2010 | 2009 | +1% | -1% | ||||||||||||||||||||||||
(in millions of Mexican pesos) | ||||||||||||||||||||||||||||||||
Mexican and Foreign Subsidiaries: | ||||||||||||||||||||||||||||||||
Discount rate | 7.6 | % | 7.6 | % | 8.2 | % | 4.0 | % | 4.0 | % | 4.5 | % | Ps. (386 | ) | Ps.567 | |||||||||||||||||
Salary increase | 4.8 | % | 4.8 | % | 5.1 | % | 1.2 | % | 1.2 | % | 1.5 | % | 419 | (275 | ) | |||||||||||||||||
Long-term asset return | 9.0 | % | 8.2 | % | 8.2 | % | 5.0 | % | 3.6 | % | 4.5 | % | (16 | ) | 17 |
Income taxes
As we describe in Note 23 to our audited consolidated financial statements, the Mexican tax reform as effective in 2011 did not impact our tax result. However, the following are the most important changes pursuant to the Mexican tax reform as effective in 2010 that are applicable to recent and upcoming years: an increase in the VAT rate from 15% in 2009 to 16% in 2010 and future years; an increase in the special tax on production and services from 25% in 2009 to 26.5% in 2010 and future years; and an increase in the statutory income tax rate from 28% in 2009 to 30% for 2010, 2011 and 2012, with a reduction from 30% to 29% and 28% for 2013 and 2014, respectively. In addition, the Mexican tax reform as effective in 2010 requires that income tax payments related to consolidated tax benefits obtained since 1999 be paid during the succeeding five years beginning in the sixth year when tax benefits were used. See Note 23 C and D12 to our audited consolidated financial statements.
TheImpuesto Empresarial de Tasa Unica (IETU) functions similarlyWe assess at each reporting date whether there is an indication that an asset may be impaired. If any indication exists, or when annual impairment testing for an asset is required, we estimate the asset’s recoverable amount. When the carrying amount of an asset or CGU exceeds its recoverable amount, the asset is considered impaired and is written down to an alternative minimum corporate income tax, exceptits recoverable amount. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that any amounts paid are not creditable against future income tax payments. Mexican taxpayers are now subjectreflects current market assessments of the time value of money and the risks specific to the higherasset. In determining fair value less costs to sell, recent market transactions are taken into account, if available. If no such transactions can be identified, an appropriate valuation model is used. These calculations are corroborated by valuation multiples, quoted share prices for publicly traded subsidiaries or other available fair value indicators.
Useful lives of property, plant and equipment and intangible assets with defined useful lives
Property, plant and equipment, including returnable bottles as they are expected to provide benefits over a period of more than one year, as well as intangible assets with defined useful lives, are depreciated/amortized over their estimated useful lives. We base our estimates on the experience of our technical personnel as well as on our experience in the industry for similar assets; see Notes 3.12, 3.14, 11 and 12 to our audited consolidated financial statements.
Post-employment and other long-term employee benefits
We regularly evaluate the reasonableness of the IETU or the income tax liability computed under Mexican Income Tax Law. The IETUassumptions used in our post-employment and other long-term employee benefit computations. Information about such assumptions is calculated on a cash-flow basis, the rate for 2009 was 17.0% and the rate for both 2010 and 2011 was 17.5%.
We have paid corporate income tax since IETU came into effect and, based ondescribed in Note 16 to our financial projections estimated for our Mexican tax returns, we expect to continue paying corporate income tax in the future and do not expect to pay IETU, therefore we did not record deferred IETU. As such, the enactment of IETU did not impact ouraudited consolidated financial position or results from operations, as it only recognizes deferredstatements.
Income taxes
Deferred income tax.
We recognize deferred tax assets and liabilities are determined based on the differences between the financial statement carrying amounts and the tax basis of assets and liabilities. We regularly review our deferred tax assets for recoverability, and/or payment, and establishrecord a valuation allowancedeferred tax asset based on our judgment regarding the probability of historical taxable income continuing in the future, projected future taxable income and the expected timing of the reversals of existing temporary differences. If these estimates and related assumptions change in the future, we may be requireddifferences; see Note 24 to record additional valuation allowances against our deferred tax assets, resulting in an impact in net income.
The statutory income tax rate in Mexico was 30% for each of 2011 and 2010, and 28% for 2009. The statutory income tax rate in Panama was 25%, 27.5% and 30%, respectively, for 2011, 2010 and 2009. The statutory income tax rates for 2011 in other countries in which we do business were: 31% in Guatemala; 30% in Nicaragua; 30% in Costa Rica; 33% in Colombia; 34% in Venezuela; 34% in Brazil; and 35% in Argentina. Tax loss carry-forwards may be applied to income tax over certain periods of time, varying by country as follows: in Mexico, 10 years; in Nicaragua, Costa Rica and Venezuela, 3 years; in Panama and Argentina, 5 years; in Colombia, tax losses may be carried forward for an indefinite period of time but are limited to 25% of taxable income for the relevant year; and in Brazil, tax losses may be carried forward for an indefinite period of time but cannot be restated and are limited to 30% of taxable income for the relevant year. We make judgments about the recoverability of tax loss carry-forward assets as described above.audited consolidated financial statements.
Indirect taxTax, labor and legal contingencies and provisions
We are subject to various claims and contingencies, related to indirect tax, labor and legal proceedings as described in Note 2425 to our audited consolidated financial statements. Due to their nature, such legal proceedings involve inherent uncertainties including, but not limited to, court rulings, negotiations between affected parties and governmental actions. Management periodically assesses the probability of loss for such contingencies and accrues a liabilityprovision and/or discloses the relevant circumstances, as appropriate. If the potential loss fromof any claim or legal proceeding is considered probable and the amount can be reasonably estimated, we accrue a liabilityprovision for the estimated loss. Management’s judgment must be exercised to determine the likelihood of such a loss and an estimate of the amount, due to the subjective nature of the loss.
DerivativeValuation of financial instruments
We are required to measure all derivative financial instruments at fair value and recognize them in the balance sheet as an asset or liability. Changes in the fair value of derivative financial instruments are recorded each year in net income or as a component of cumulative other comprehensive income, based on whether the instrument provides a hedge and is designated as such, and the ineffectiveness of the hedge.value. The fair values of derivative financial instruments are determined considering quoted prices in recognized markets. If such instruments are not traded, fair value is determined by applying techniques based upon technical models supported by sufficient reliable and verifiable data, recognized in the financial sector. We base our forward price curves upon market price quotations.
As described Management believes that the chosen valuation techniques and assumptions used are appropriate in determining the fair value of financial instruments; see Note 2820 to our audited consolidated financial statements, westatements.
Business combinations
Acquisitions of businesses are adopting IFRSaccounted for using the preparation of our financial information beginningacquisition method. The consideration transferred in 2012. Pursuant to current SEC reporting requirements, foreign private issuers may provide in their SEC filings financial statements prepared in accordance with IFRS, without a reconciliation to U.S. GAAP.
The consolidated financial statements to be issued by us for the year ending December 31, 2012 will be our first annual financial statements that comply with IFRS. Our IFRS transition datebusiness combination is January 1, 2011, and therefore, the year ended December 31, 2011 will be the comparative period to be covered. IFRS 1, “First-Time Adoption of International Financial Reporting Standards” (which we refer to as IFRS 1), sets forth mandatory exceptions and allows certain optional exemptions to the complete retrospective application of IFRS.
Mandatory Exceptions
We have applied the following mandatory exceptions to retrospective application of IFRS, effective as of our IFRS transition date:
Accounting Estimates
Estimates prepared under IFRS as of January 1, 2011 are consistent with the estimates recognized under Mexican FRS as of the same date, unless we are required to adjust such estimates to agree with IFRS.
Derecognition of Financial Assets and Liabilities
We applied the derecognition rules of IAS 39, “Financial Instruments: Recognition and Measurement” (which we refer to as IAS 39) prospectively for transactions occurring on or after our IFRS transition date.
Hedge Accounting
As of our IFRS transition date, we have measured at fair value, all derivative financial instruments and hedging relationships designated and documented effectively as accounting hedges, as required by IAS 39, which is consistent withcalculated as the treatment under Mexican FRS. As a result, there was no impact in our consolidated financial statements duesum of the acquisition-date fair values of the assets transferred by us, liabilities assumed by us to the applicationformer owners of this exception.
Non-controlling Interest
We have applied the requirements of IAS 27, “Consolidatedacquiree and Separate Financial Statements” (which we refer to as IAS 27) related to non-controlling interests prospectively beginning on our IFRS transition date.
Optional Exemptions
We have elected the following optional exemptions to retrospective application of IFRS, effective as of our IFRS transition date:
Business Combinations and Acquisitions of Associates and Joint Ventures
According to IFRS 1, an entity may elect not to apply IFRS 3, “Business Combinations” retrospectively to acquisitions made prior to the transition date to IFRS.
The exemption for past business combinations also applies to past acquisitions of investments in associates and of interests in joint ventures.
We have adopted this exemption and did not amend our business acquisitions or investments in associates and joint ventures prior to our IFRS transition date and we did not remeasure the values determined at the acquisition dates, including the amount of previously recognized goodwill in past acquisitions.
Share-based Payments
We have share-based plans, which we pay to our qualifying employees based on our own shares and those of our subsidiary, Coca-Cola FEMSA. Management decided to apply the optional exemptions established in IFRS 1, whereas we did not apply IFRS 2, “Share-based Payment” (which we refer to as IFRS 2): (i) to the equity instruments granted before November 7, 2002, (ii) to equity instruments granted after November 7, 2002 and that were earned before the latter of (a) our IFRS transition date and (b) January 1, 2005 and (iii) liabilities related to share-based payment transactions that were settled before our IFRS transition date.
Deemed Cost
An entity may individually elect to measure an item of its property, plant and equipment at the transition date to IFRS at its fair value and use that fair value as its deemed cost at that date. In addition, a first-time adopter may elect to use a previous generally accepted accounting principles revaluation of an item of property, plant and equipment at, or before, the transition date to IFRS as deemed cost at the dateinterests issued by us in exchange for control of the revaluation, if the revaluation was, at such date of the revaluation, broadly comparable to either (i) fair value, or (ii) cost or depreciated cost in accordance with IFRS and adjusted to reflect changes in a general or specific price index.acquiree.
We have presented both our property, plant and equipment and our intangible assets at IFRS historical cost in all countries. In Venezuela, this IFRS historical cost represents actual historical cost in the year of acquisition, indexed for inflation in a hyperinflationary economy based on the provisions of IAS 29, “Hyperinflationary Economies” (which we refer to as IAS 29).
Cumulative Translation Effect
A first-time adopter is neither required to recognize translation differences and accumulate these in a separate component of equity, nor on a subsequent disposal of a foreign operation, to reclassify the cumulative translation difference for that foreign operation from equity to profit or loss as part of the gain or loss on disposal that would have existed at the IFRS transition date.
We applied this exemption and consequently we reclassified the accumulated translation effect recorded under Mexican FRS to retained earnings and, beginning January 1, 2011, we calculate the translation effect of our foreign operations prospectively according to IAS 21, “The Effects of Changes in Foreign Exchange Rates.”
Borrowing Costs
We applied the IFRS 1 exemption related to borrowing costs incurred for qualifying assets existing at the IFRS transition date, based on our similar Mexican FRS accounting policy, and beginning January 1, 2011 we capitalize eligible borrowing costs in accordance with IAS 23, “Borrowing Costs” (which we refer to as IAS 23).
Recording Effects of the Transition from Mexican FRS to IFRS
The following disclosures provide a qualitative description of the most significant preliminary effects from the transition to IFRS determined as of the date of the issuance of our consolidated financial statements.
Inflation Effects
According to Mexican FRS, the Mexican peso ceased to be the currency of an inflationary economy on December 31, 2007, as the three years’ cumulative inflation as of such date did not exceed 26%.
According to IAS 29, the last hyperinflationary period for the Mexican peso was in 1998. As a result, we have eliminated the cumulative inflation recognized within long-lived assets and contributed capital for our Mexican operations, based on Mexican FRS during the years 1999 through 2007, which were not deemed hyperinflationary for IFRS purposes.
For our foreign operations, the cumulative inflation fromAt the acquisition date, was eliminated (except in the case of Venezuela, which was deemed to be a hyperinflationary economy) fromidentifiable assets acquired and the date on which we began to consolidate them.liabilities assumed are recognized at their fair value, except that:
• | Deferred tax assets or liabilities, and assets or liabilities related to employee benefit arrangements are recognized and measured in accordance with IAS 12, “Income Taxes” and IAS 19, “ Coca-Cola FEMSA Substantially all of Coca-Cola FEMSA’s sales are derived from sales ofCoca-Cola trademark beverages. Coca-Cola FEMSA produces, markets, sells and distributesCoca-Cola trademark beverages through standard bottler agreements in certain territories in the countries in which it operates. See “Item 4. Information on the Company—Coca-Cola FEMSA—Coca-Cola FEMSA’s Territories.” Through its rights under Coca-Cola FEMSA’s bottler agreements and as a large shareholder, The Coca-Cola Company has the right to The Coca-Cola Company may unilaterally set the price for its concentrate. In addition, under Coca-Cola FEMSA’s bottler agreements, it is prohibited from bottling or distributing any other beverages without The Coca-Cola Company’s authorization or consent, and may not transfer control of the bottler rights of any of its territories without prior consent from The Coca-Cola Company. The Coca-Cola Company also makes significant contributions to Coca-Cola FEMSA’s marketing expenses, although it is not required to contribute a Coca-Cola FEMSA depends on The Coca-Cola Company to continue with its bottler agreements. All of Coca-Cola FEMSA’s bottler agreements are automatically renewable for ten-year terms, subject to the right of either party to give prior notice that it does not wish to renew the applicable agreement. In addition, these agreements generally may be terminated in the case of material breach.See “Item 10. Additional Information—Material Contracts—Material Contracts Relating to Coca-Cola FEMSA—Bottler Agreements.” Termination would prevent Coca-Cola FEMSA from selling Coca-Cola trademark beverages in the affected territory and would have an adverse effect on Coca-Cola FEMSA’s business, financial condition, results and prospects. The Coca-Cola Company has substantial influence on the conduct of Coca-Cola FEMSA’s business, which may result in Coca-Cola FEMSA taking actions contrary to the interests of its remaining shareholders. The Coca-Cola Company has substantial influence on the conduct of Coca-Cola FEMSA’s business. As of April 17, 2015, The Coca-Cola Company indirectly owned 28.1% of Coca-Cola FEMSA’s outstanding capital stock, representing 37.0% of Coca-Cola FEMSA’s shares with full voting rights. The Coca-Cola Company is entitled to appoint five of Coca-Cola FEMSA’s maximum of 21 directors and the Changes in consumer preference and public concern about health related issues could reduce demand for some of Coca-Cola FEMSA’s products. The non-alcoholic beverage industry is evolving as a result of, among other things, changes in consumer preferences and regulatory actions. There have been different plans and actions adopted in recent years by governmental authorities in some of the countries where Coca-Cola FEMSA operates that have resulted in increased taxes or the imposition of new taxes on the sale of beverages containing certain sweeteners, and other regulatory measures, such as restrictions on advertising for some of Coca-Cola FEMSA’s products. Moreover, researchers, health advocates and dietary guidelines are encouraging consumers to reduce their consumption of certain types of beverages sweetened with sugar and High Fructose Corn Syrup, or HFCS. In addition, concerns over the environmental impact of plastic may reduce the consumption of Coca-Cola FEMSA’s products sold in plastic bottles or result in additional taxes that would adversely affect consumer demand. Increasing public concern about these issues, possible new or increased taxes, regulatory measures and governmental regulations could reduce demand for some of Coca-Cola FEMSA’s products which would adversely affect its results. Competition could adversely affect Coca-Cola FEMSA’s financial performance. The beverage industry in the territories in which Coca-Cola FEMSA operates is highly competitive. Coca-Cola FEMSA faces competition from other bottlers of sparkling beverages, such asPepsi products, and from producers of low cost beverages or “B brands.” Coca-Cola FEMSA also competes in beverage categories other than sparkling beverages, such as water, juice-based beverages, teas, sport drinks and value-added dairy products. Although competitive conditions are different in each of its territories, Coca-Cola FEMSA competes principally in terms of price, packaging, consumer sales promotions, customer service and product innovation.See “Item 4. Information on the Company—Coca-Cola FEMSA—Competition.” There can be no assurances that Coca-Cola FEMSA will be able to avoid lower pricing as a result of competitive pressure. Lower pricing, changes made in response to competition and changes in consumer preferences may have an Water shortages or any failure to Water is Coca-Cola FEMSA obtains the vast majority of the water used in its production from municipal utility companies and pursuant to concessions to use wells, which are generally granted based on studies of the existing and projected groundwater supply. Coca-Cola FEMSA’s existing water concessions or contracts to obtain water may be terminated by governmental authorities under certain circumstances and their renewal depends on receiving necessary authorizations from local and/or federal water authorities.See “Item 4. Information on the Company—Regulatory Matters—Water Supply.” In some of its other territories, Coca-Cola FEMSA’s existing water supply may not be sufficient to meet its future production needs, and the available water supply may be adversely affected by shortages or changes in governmental regulations and environmental changes. Water supply in the São Paulo region has been recently affected by low rainfall, which has affected the main water reservoir that serves the greater São Paulo area (Cantareira). Although Coca-Cola FEMSA’s Jundiaí plant does not obtain water from this water reservoir, water shortages or changes in governmental regulations aimed at rationalizing water in the region could affect Coca-Cola FEMSA’s water supply in its Jundiaí plant. We cannot assure you that water will be available in sufficient quantities to meet Coca-Cola FEMSA’s future production needs or will prove sufficient to meet its water supply needs. Increases in the prices of raw materials would increase Coca-Cola FEMSA’s cost of goods sold and may adversely affect its results. In addition to water, Coca-Cola FEMSA’s most significant raw materials are (1) concentrate, which it acquires from affiliates of The Coca-Cola Company, (2) sweeteners and (3) packaging materials. Prices forCoca-Cola trademark beverages concentrate are determined by The Coca-Cola Company as a percentage of the weighted average retail price in local currency, net of applicable taxes. The Coca-Cola Company has unilaterally increased concentrate prices in the past and may do so again in the future. We cannot assure you that The Coca-Cola Company will not increase the price of the concentrate forCoca-Cola trademark beverages or change the manner in which such price will be calculated in the future. Coca-Cola FEMSA may not be successful in negotiating or implementing measures to mitigate the negative effect this may have in the pricing of its products or its results. The prices for Coca-Cola FEMSA’s remaining raw materials are driven by market prices and local availability, the imposition of import duties and restrictions and fluctuations in exchange rates. Coca-Cola FEMSA is also required to meet all of its supply needs from suppliers approved by The Coca-Cola Company, which may limit the number of suppliers available to it. Coca-Cola FEMSA’s sales prices are denominated in the local currency in each country in which it operates, while the prices of certain materials, including those used in the bottling of its products, mainly resin, preforms to make plastic bottles, finished plastic bottles, aluminum cans and HFCS, are paid in or determined with reference to the U.S. dollar, and therefore may increase if the U.S. dollar appreciates against the currency of the countries in which Coca-Cola FEMSA operates. We cannot anticipate whether the U.S. dollar will appreciate or depreciate with respect to such currencies in the future.See “Item 4. Information on the Company—Coca-Cola FEMSA—Raw Materials.” Coca-Cola FEMSA’s most significant packaging raw material costs arise from the purchase of resin and plastic preforms to make plastic bottles and from the purchase of finished plastic bottles, the prices of which are related to crude oil prices and global resin supply. The average prices that Coca-Cola FEMSA paid for resin and plastic preforms in U.S. dollars in 2014, as compared to 2013 were lower in Mexico, Central America, Colombia and Argentina, remained flat in Venezuela and were higher in Brazil. We cannot assure you that prices will not increase in future periods. During 2014, average sweetener prices in Mexico, Brazil and Argentina were lower as compared to 2013, remained flat in Colombia and Nicaragua and were higher in Venezuela, Costa Rica and Panama. From 2010 through 2014, international sugar prices were volatile due to various factors, including shifting demands, availability and climate issues affecting production and distribution. In all of the countries in which Coca-Cola FEMSA operates, other than Brazil, sugar prices are subject to local regulations and other barriers to market entry that cause Coca-Cola FEMSA to pay in excess of international market prices.See “Item 4. Information on the Company—Coca-Cola FEMSA—Raw Materials.” We cannot assure you that Coca-Cola FEMSA’s raw material prices will not further increase in the future. Increases in the prices of raw materials would increase Coca-Cola FEMSA’s cost of goods sold and adversely affect its financial performance. Taxes could adversely affect Coca-Cola FEMSA’s business. The countries in which Coca-Cola FEMSA operates may adopt new tax laws or modify existing tax laws to increase taxes applicable to Coca-Cola FEMSA’s business or products. Coca-Cola FEMSA’s products are subject to certain taxes in many of the countries in which it operates, such as certain countries in Central America, Mexico, Brazil, Venezuela and Argentina, which impose taxes on sparkling beverages.See “Item 4. Information on the Company—Regulatory Matters—Taxation of Beverages.”The imposition of new taxes or increases in existing taxes, or changes in the interpretation of tax laws and regulation by tax authorities, may have a material adverse effect on Coca-Cola FEMSA’s business, financial condition, prospects and results. Tax legislation in some of the countries in which Coca-Cola FEMSA operates have recently been subject to major changes.See “Item 4. Information on the Company—Regulatory Matters—Mexican Tax Reform”and Item 4. Information on the Company—Regulatory Matters—Other Recent Tax Reforms.”We cannot assure you that these reforms or other reforms adopted by governments in the countries in which Coca-Cola FEMSA operates will not have a material adverse effect on its business, financial condition and results of operation. Regulatory developments may adversely affect Coca-Cola FEMSA’s business. Coca-Cola FEMSA is subject to regulation in each of the territories in which it operates. The principal areas in which Coca-Cola FEMSA is subject to regulation are water, environment, labor, taxation, health and antitrust. Regulation can also affect Coca-Cola FEMSA’s ability to set prices for its products.See “Item 4. Information on the Company—Regulatory Matters.” The adoption of new laws or regulations or a stricter interpretation or enforcement thereof in the countries in which Coca-Cola FEMSA operates may increase its operating costs or impose restrictions on its operations which, in turn, may adversely affect Coca-Cola FEMSA’s financial condition, business and results. In particular, environmental standards are becoming more stringent in several of the countries in which Coca-Cola FEMSA operates, and Coca-Cola FEMSA is in the process of complying with these standards; however we cannot assure you that in any event Coca-Cola FEMSA will be able to meet any timelines for compliance established by the relevant regulatory authorities.See “Item 4. Information on the Company—Regulatory Matters—Environmental Matters.” Further changes in current regulations may result in an increase in compliance costs, which may have an adverse effect on Coca-Cola FEMSA’s future results or financial condition. Voluntary price restraints or statutory price controls have been imposed historically in several of the countries in which Coca-Cola FEMSA operates. Currently, there are no price controls on Coca-Cola FEMSA’s products in any of the territories in which it has operations, except for those in Argentina, where authorities directly supervise five of Coca-Cola FEMSA’s products sold through supermarkets as a measure to control inflation, and Venezuela, where the government has imposed price controls on certain of Coca-Cola FEMSA’s products, including bottled water, and has recently imposed a limit on profits earned on the sale of goods, including Coca-Cola FEMSA’s products, seeking to maintain price stability of, and equal access to, goods and services. If Coca-Cola FEMSA exceeds such limit on profits, it may be forced to reduce the prices of its products in Venezuela, which would in turn adversely affect its business and results of operations. In addition, consumer protection laws in Venezuela are subject to continuing review and changes, and any such changes may have an adverse impact on Coca-Cola FEMSA. We cannot assure you that existing or future regulations in Venezuela relating to goods and services will not result in increased limits on profits or a forced reduction of prices affecting Coca-Cola FEMSA’s products, which could have a negative effect on its results of operations. The imposition of these restrictions or voluntary price restraints in other territories may have an adverse effect on Coca-Cola FEMSA’s results and financial position.See “Item 4. Information on the Company—Regulatory Matters—Price Controls.” We cannot assure you that governmental authorities in any country where Coca-Cola FEMSA operates will not impose statutory price controls or that Coca-Cola FEMSA will not need to implement voluntary price restraints in the future. Unfavorable results of legal proceedings could have an adverse effect on Coca-Cola FEMSA’s results or financial condition. Coca-Cola FEMSA’s operations have from time to time been and may continue to be subject to investigations and proceedings by antitrust authorities, and litigation relating to alleged anticompetitive practices. Coca-Cola FEMSA has also been subject to investigations and proceedings on environmental and labor matters. We cannot assure you that these investigations and proceedings will not have an adverse effect on Coca-Cola FEMSA’s results or financial condition.See “Item 8. Financial Information—Legal Proceedings.” Weather conditions may adversely affect Coca-Cola FEMSA’s results. Lower temperatures, higher rainfall and other adverse weather conditions such as typhoons and hurricanes may negatively impact consumer patterns, which may result in lower per capita consumption of Coca-Cola FEMSA’s beverage offerings. Additionally, such adverse weather conditions may affect road infrastructure and points of sale in the territories in which Coca-Cola FEMSA operates and limit Coca-Cola FEMSA’s ability to sell and distribute its products, thus affecting its results. Coca-Cola FEMSA may not be able to successfully integrate its recent acquisitions and achieve the operational efficiencies and/or expected synergies. Coca-Cola FEMSA has and may continue to acquire bottling operations and other businesses. A key element to achieve the benefits and expected synergies of Coca-Cola FEMSA’s recent and future acquisitions and/or mergers is to integrate the operation of acquired or merged businesses into its operations in a timely and effective manner. Coca-Cola FEMSA may incur unforeseen liabilities in connection with acquiring, taking control of, or managing bottling operations and other businesses and may encounter difficulties and unforeseen or additional costs in restructuring and integrating them into its operating structure. We cannot assure you that these efforts will be successful or completed as expected by Coca-Cola FEMSA, and Coca-Cola FEMSA’s business, results and financial condition could be adversely affected if it is unable to do so. Political and social events in the countries in which Coca-Cola FEMSA operates may significantly affect its operations. Political and social events in the countries in which Coca-Cola FEMSA operates, as well as changes in governmental policies may have an adverse effect on Coca-Cola FEMSA’s business, results of operations and financial condition. In recent years, some of the governments in the countries in which Coca-Cola FEMSA operates have implemented and may continue to implement significant changes in laws, public policy and/or regulations that could affect the political and social conditions in these countries. Any such changes may have an adverse effect on Coca-Cola FEMSA’s business, results of operations and financial condition. We cannot assure you that political or social developments in any of the countries in which Coca-Cola FEMSA operates, such as the election of new administrations, political disagreements, civil disturbances and the rise in violence and perception of violence, over which Coca-Cola FEMSA has no control, will not have a corresponding adverse effect on the local or global markets or on Coca-Cola FEMSA’s business, results of operations and financial condition. FEMSA Comercio Competition from other retailers in Mexico could adversely affect FEMSA Comercio’s business. The Mexican retail sector is highly competitive. FEMSA participates in the retail sector primarily through FEMSA Comercio. FEMSA Comercio’s OXXO stores face competition from small-format stores like 7-Eleven, Extra, Super City, Círculo K stores and other numerous chains of retailers across Mexico, from other regional small-format retailers to small informal neighborhood stores. In particular, small informal neighborhood stores can sometimes avoid regulatory oversight and taxation, enabling them to sell certain products at below market prices. In addition, these small informal neighborhood stores could improve their technological capabilities so as to enable credit card transactions and electronic payment of utility bills, which would diminish FEMSA Comercio’s competitive advantage. FEMSA Comercio may face additional competition from new market entrants. Increased competition may limit the number of new locations available to FEMSA Comercio and require FEMSA Comercio to modify its product offering or pricing. In addition, consumers may prefer alternative products or store formats offered by competitors. As a result, FEMSA Comercio’s results and financial position may be adversely affected by competition in the future. Sales of OXXO small-format stores may be adversely affected by changes in economic conditions in Mexico. Small-format stores often sell certain products at a premium. The small-format store market is thus highly sensitive to economic conditions, since an economic slowdown is often accompanied by a decline in consumer purchasing power, which in turn results in a decline in the overall consumption of FEMSA Comercio’s main product categories. During periods of economic slowdown, OXXO stores may experience a decline in traffic per store and purchases per customer, and this may result in a decline in FEMSA Comercio’s results. Regulatory changes may adversely affect FEMSA Comercio’s business. In Mexico, FEMSA Comercio is subject to regulation in areas such as labor, taxation and local permits. The adoption of new laws or regulations, or a stricter interpretation or enforcement of existing laws and regulations, may increase operating costs or impose restrictions on FEMSA Comercio’s operations which, in turn, may adversely affect FEMSA Comercio’s financial condition, business and results. Further changes in current regulations may negatively impact traffic, revenues, operational costs and commercial practices, which may have an adverse effect on FEMSA Comercio’s future results or financial condition. Taxes could adversely affect FEMSA Comercio’s business. Mexico, where FEMSA Comercio primarily operates, may adopt new tax laws or modify existing laws to increase taxes applicable to FEMSA Comercio’s business or products. The imposition of new taxes or increases in existing taxes, or changes in the interpretation of tax laws and regulation by tax authorities, may have a material adverse effect on FEMSA Comercio’s business, financial condition, prospects and results.See “Item 4. Information on the Company—Regulatory Matters—Mexican Tax Reform.” FEMSA Comercio may not be able to maintain its historic growth rate. FEMSA Comercio increased the number of OXXO stores at a compound annual growth rate of 11.1% from 2010 to 2014. The growth in the number of OXXO stores has driven growth in total revenue and results at FEMSA Comercio over the same period. As the overall number of stores increases, percentage growth in the number of OXXO stores is likely to decrease. In addition, as small-format store penetration in Mexico grows, the number of viable new store locations may decrease, and new store locations may be less favorable in terms of same-store sales, average ticket and store traffic. As a result, FEMSA Comercio’s future results and financial condition may not be consistent with prior periods and may be characterized by lower growth rates in terms of total revenue and results. In Colombia, FEMSA Comercio may not be able to maintain similar historic growth rates to those in Mexico. FEMSA Comercio’s business depends heavily on information technology. FEMSA Comercio invests aggressively in information technology (which we refer to as FEMSA Comercio’s business could be adversely affected by a FEMSA Comercio’s business relies heavily on its advanced IT system to effectively manage its data, communications, connectivity, and other business processes. Although we constantly improve our IT system and protect it with advanced security measures, it may still be subject to defects, interruptions, or security breaches such as viruses or data theft. Such a defect, interruption, or breach could adversely affect FEMSA Comercio’s results or financial position. FEMSA Comercio’s business may be adversely affected by an increase in the The performance of FEMSA Comercio’s stores would be adversely affected by increases in the price of utilities on which the stores depend, such as electricity. Although the price of electricity in Mexico has remained stable recently, it could potentially increase as a result of inflation, shortages, interruptions in supply, or other reasons, and such an increase could adversely affect our results or financial position. FEMSA Comercio’s business acquisitions may lead to decreased profit margins. FEMSA Comercio has recently entered into new markets through the acquisition of other small-format retail businesses. FEMSA Comercio continued with this strategy in 2014 and may continue it into the future. These new businesses are currently less profitable than OXXO, and might therefore marginally dilute FEMSA Comercio’s margins in the short to medium term. Risks Related to Our Holding of Heineken N.V. and Heineken Holding N.V. Shares FEMSA does not control Heineken N.V.’s and Heineken Holding N.V.’s decisions. On April 30, 2010, FEMSA announced the closing of the
Heineken is present in a large number of countries. Heineken is a global brewer and distributor of beer in a large number of countries. As a consequence of the Heineken transaction, FEMSA shareholders are indirectly exposed to the political, economic and social circumstances affecting the markets in which The Mexican peso may strengthen compared to the Euro. In the event of a depreciation of the euro against the Mexican peso, the fair value of FEMSA’s investment in Heineken’s shares will be adversely affected. Furthermore, the cash flow that Heineken N.V. and Heineken Holding N.V. are publicly listed companies. Heineken N.V. and Heineken Holding N.V. are listed companies whose stock trades publicly and is subject to
Risks Related to Our Principal Shareholders and Capital Structure A majority of our voting shares are held by a voting trust, which effectively controls the management of our company, and the interests of which may differ from those of other shareholders. As of March 19, 2015, a voting trust, of which the participants are members of seven families, owned 38.69% of our capital stock and 74.86% of our capital stock with full voting rights, consisting of the Series B Shares. Consequently, the voting trust has the power to elect a majority of the members of our board of directors and to play a significant or controlling role in the outcome of substantially all matters to be decided by our board of directors or our shareholders. The interests of the voting trust may differ from those of our other shareholders.See “Item 7. Major Shareholders and Related Party Transactions” and “Item 10. Additional Information—Bylaws—Voting Rights and Certain Minority Rights.” Holders of Series D-B and D-L Shares have limited voting rights. Holders of Series D-B and D-L Shares have limited voting rights and are only entitled to vote on specific matters, such as certain changes in the form of our corporate organization, dissolution, or liquidation, a merger with a company with a distinct corporate purpose, a merger in which we are not the
Securities Law. As a result of Holders of Our shares are traded on the Holders of BD Units in the United States and holders of ADSs may not be able to participate in any future preemptive rights offering and as a result may be subject to dilution of their equity interests. Under applicable Mexican law, if we issue new shares for cash as a part of a We may decide not to file a registration statement with the SEC to allow holders of our shares or ADSs who are located in the United States to participate in a preemptive rights offering. In addition, under current Mexican law, the sale by the ADS depositary of preemptive rights and the distribution of the proceeds from such sales to the holders of our shares in the form of ADSs is not possible. As a result, the equity interest of holders of our shares in the form of ADSs would be diluted proportionately.See “Item 10. Additional Information—Bylaws—Preemptive Rights.” The protections afforded to minority shareholders in Mexico are different from those afforded to minority shareholders in the United States. Under Mexican law, the protections afforded to minority shareholders are different from, and may be less than, those afforded to minority shareholders in the United States. Mexican laws do not provide a remedy to shareholders relating to violations of fiduciary duties. There is no procedure for class actions as such actions are conducted in the United States and there are different procedural requirements for bringing shareholder lawsuits against directors for the benefit of companies. Therefore, it may be more difficult for minority shareholders to enforce their rights against us, our directors or our controlling shareholders than it would be for minority shareholders of a United States company. Investors may experience difficulties in enforcing civil liabilities against us or our directors, officers and controlling persons. FEMSA is organized under the laws of Mexico, and most of our directors, officers and controlling persons reside outside the United States. In addition, nearly all or a substantial portion of our assets and the assets of our subsidiaries are located outside the United States. As a result, it may be difficult for investors to effect service of process within the United States on such persons or to enforce judgments against them, including any action based on civil liabilities under the U.S. federal securities laws. There is doubt as to the enforceability against such persons in Mexico, whether in original actions or in actions to enforce judgments of U.S. courts, of liabilities based solely on the U.S. federal securities laws. Developments in other countries may adversely affect the market for our securities. The market value of securities of Mexican companies is, to varying degrees, influenced by economic and securities market conditions in other emerging market countries. Although economic conditions are different in each country, investors’ reaction to developments in one country can have effects on the securities of issuers in other countries, including Mexico. We cannot assure you that events elsewhere, especially in emerging markets, will not adversely affect the market value of our securities. The failure or inability of our subsidiaries to pay dividends or other distributions to us may adversely affect us and our ability to pay dividends to holders of ADSs. We are a holding company. Accordingly, our cash flows are principally derived from dividends, interest and other distributions made to us by our subsidiaries. Currently, our subsidiaries do not have contractual obligations that require them to pay dividends to us. In addition, debt and other contractual obligations of our subsidiaries may in the future impose restrictions on our subsidiaries’ ability to make dividend or other payments to us, which in turn may adversely affect our ability to pay dividends to shareholders and meet our debt and other obligations. As of March 31, 2015, we had no restrictions on our ability to pay dividends. Given the 2010 exchange of 100% of our ownership of the business of Cuauhtémoc Moctezuma Holding, S.A. de C.V. (formerly FEMSA Cerveza, S.A. de C.V.) (which we refer to as Cuauhtémoc Moctezuma or FEMSA Cerveza) for a 20% economic interest in Heineken, our non-controlling shareholder position in Heineken means that we will be unable to require payment of dividends with respect to the Heineken shares. Risks Related to Mexico and the Other Countries in Which We Operate Adverse economic conditions in Mexico may adversely affect our financial position and results. We are
Our business may be significantly affected by the general condition of the Mexican economy, or by the rate of inflation in Mexico, interest rates in Mexico and exchange rates for, or exchange controls affecting, the Mexican peso. Decreases in the growth rate of the Mexican economy, periods of negative growth and/or increases in inflation or interest rates may result in lower demand for our products, lower real pricing of our products or a shift to lower margin products. Because a large percentage of our costs and expenses are fixed, we may not In addition, an increase in interest rates in Mexico would increase the cost of our debt and would cause an adverse effect on our financial position and results. Mexican Depreciation of the Depreciation of the Mexican peso relative to the U.S. dollar increases the cost to us of a portion of the raw materials we acquire, the price of which is paid in or determined with reference to U.S. dollars, and of our debt obligations denominated in U.S. dollars, and thereby negatively affects our financial position and results. A severe devaluation or depreciation of the Mexican peso may result in disruption of the international foreign exchange markets and may limit our ability to transfer or to convert Mexican pesos into U.S. dollars and other currencies for the purpose of making timely payments of interest and principal on our U.S. dollar-denominated debt or obligations in other currencies. The Mexican peso is a free-floating currency and as such, it experiences exchange rate fluctuations relative to the U.S. dollar over time. During 2011, 2012 and 2013, the Mexican peso experienced fluctuations relative to the U.S. dollar consisting of 12.7% of depreciation, 7.1% of recovery and 1.0% of depreciation, respectively, compared to the years of 2010, 2011 and 2012. During 2014, the Mexican peso experienced a depreciation relative to the U.S. dollar of approximately 12.6% compared to 2013. In the first quarter of 2015, the Mexican peso appreciated approximately 3.2% relative to the U.S. dollar compared to the fourth quarter of 2014. While the Mexican government does not currently restrict, and since 1982 has not restricted, the right or ability of Mexican or foreign persons or entities to convert Mexican pesos into U.S. dollars or to transfer other currencies out of Mexico, the Mexican government could institute restrictive exchange rate policies When the financial markets are volatile, as they have been in recent periods, our results may be substantially affected by Political events in Mexico could adversely affect our operations. Mexican political events may Security risks in Mexico could increase, and this could adversely affect our results. The presence of violence among drug cartels, and between these and the Mexican law enforcement and armed forces, pose a risk to our business. Organized criminal activity and related violent incidents have decreased relative to 2012 and 2013, but remain prevalent in some parts of Mexico. These incidents are relatively concentrated along the northern Mexican border, as well as in certain other Mexican states such as Sinaloa, Michoacán and Guerrero. The north of Mexico is an important region for our retail operations, and an increase in crime rates could negatively affect our sales and customer traffic, increase our security expenses, and result in higher turnover of personnel or damage to the perception of our brands. This situation could worsen and adversely impact our business and financial results because consumer habits and patterns adjust to the increased perceived and real security risks, as people refrain from going out as much and gradually shift some on-premise consumption to off-premise consumption of food and beverages on certain social occasions. Depreciation of local currencies in other Latin American countries in which we operate may adversely affect our financial position. The devaluation of the local currencies against the U.S. dollar in our non-Mexican territories can increase our operating costs in these countries, and depreciation of the local currencies against the Mexican peso can negatively affect our results for these countries. In recent years, the value of the currency in the countries in which we operate has been relatively stable relative to the Mexican peso, except in Venezuela. During 2014, in addition to Venezuela, the currencies of Brazil and Argentina also depreciated against the Mexican peso. Future currency devaluation or the imposition of exchange controls in any of these countries, or in Mexico, would have an adverse effect on our financial position and results. We have operated under exchange controls in Venezuela since 2003, which limits our ability to remit dividends abroad or make payments other than in local currency and that may increase the real price paid for raw materials and services purchased in local currency. We have historically used the official exchange rate (currently 6.30 bolivars to US$ 1.00) in our Venezuelan operations. Nonetheless, since the beginning of 2014, the Venezuelan government announced a series of changes to the Venezuelan exchange control regime. In January 2014, the Venezuelan government announced an exchange rate determined by the state-run system known as theSistema Complementario de Administración de Divisas, or SICAD. In March 2014, the Venezuelan government announced a new law that authorized an alternative method of exchanging Venezuelan bolivars to U.S. dollars known as SICAD II. In February 2015, the Venezuelan government announced that it was replacing SICAD II with a new market-based exchange rate determined by the system known as the Sistema Marginal de Divisas, or SIMADI. The SICAD determines the exchange rates based on limited periodic sales of U.S. dollars through auctions in which only entities authorized by the Venezuelan government may participate, while SIMADI determines the exchange rates based on supply and demand of U.S. dollars, in which participation does not require authorization by the Venezuelan government. The SICAD and SIMADI exchange rates in effect as of April 17, 2015, were 12.00 and 196.66 bolivars per US$ 1.00, respectively. We translated our results of operations in Venezuela for the full year ended December 31, 2014 into our reporting currency, the Mexican peso, using the SICAD II exchange rate of 49.99 bolivars to US$ 1.00, which was the exchange rate in effect as of such date. As a result, we recognized a reduction in equity of Ps. 11,836 million as of December 31, 2014 and as of such date, our foreign direct investment in Venezuela was Ps. 4,015 million. This reduction adversely affected our comprehensive income for the year ended December 31, 2014. In addition, the translation of our Venezuelan results adversely affected our financial results of operation in the amount of Ps. 1,895 million for the year ended December 31, 2014. Based upon our specific facts and circumstances, we anticipate using the SIMADI exchange rate to translate our future results of operations in Venezuela into our reporting currency, the Mexican peso, commencing with our results for the first quarter of 2015. This translation effect will further adversely affect our comprehensive income and financial position. The Venezuelan government may announce further changes to the exchange rate system in the future. To the extent a higher exchange rate is applied to our investment in Venezuela in future periods as a result of changes
We are a Mexican company headquartered in Monterrey, Mexico, and our origin dates back to 1890. Our company was incorporated on May 30, 1936 and has a duration of 99 years. The duration can be extended indefinitely by resolution of our shareholders. Our legal name is Fomento Económico Mexicano, S.A.B. de C.V., and in commercial contexts we frequently refer to ourselves as FEMSA. Our principal executive offices are located at General Anaya No. 601 Pte., Colonia Bella Vista, Monterrey, Nuevo León 64410, Mexico. Our telephone number at this location is (52-81) 8328-6000. Our website is www.femsa.com. We are organized as asociedad anónima bursátil de capital variable under the laws of Mexico. We conduct our operations through the following principal holding companies, each of which we refer to as a principal sub-holding company: Coca-Cola FEMSA, which engages in the production, distribution and marketing of beverages; FEMSA Comercio, which operates small-format stores; and CB Equity, which holds our investment in Heineken. FEMSA traces its origins to the establishment of Mexico’s first brewery, Cervecería Cuauhtémoc, S.A., which we refer to as Cuauhtémoc, which was founded in 1890 by four Monterrey businessmen: Francisco G. Sada, José A. Muguerza, Isaac Garza and José M. Schneider. Descendants of certain of the founders of Cuauhtémoc are participants of the voting trust that controls the management of our company. The strategic integration of our company dates back to 1936 when our packaging operations were established to supply crown caps to the brewery. During this period, these operations were part of what was known as the Monterrey Group, which also included interests in banking, steel and other packaging operations. In 1974, the Monterrey Group was split between two branches of the descendants of the founding families of Cuauhtémoc. The steel and other packaging operations formed the basis for the creation of Corporación Siderúrgica, S.A. (now Alfa, S.A.B. de C.V.), controlled by the Garza Sada family, and the beverage and banking operations were consolidated under the Valores Industriales, S.A. de C.V. (the corporate predecessor of FEMSA) corporate umbrella controlled by the Garza Lagüera family. FEMSA’s shares were first listed on what is now the Bolsa Mexicana de Valores, S.A.B. de C.V. (which we refer to as the Mexican Stock Exchange) on September 19, 1978. Between 1977 and 1981, FEMSA diversified its operations through acquisitions in the soft drinks and mineral water industries, the establishment of the first stores under the trade name OXXO and other investments in the hotel, construction, auto parts, food and fishing industries, which were considered non-core businesses and were subsequently divested. In the 1990s, we began a series of strategic transactions to strengthen the competitive positions of our operating subsidiaries. These transactions included the sale of a 30% strategic interest in Coca-Cola FEMSA to a wholly-owned subsidiary of The Coca-Cola Company and a subsequent public offering of Coca-Cola FEMSA shares, both of which occurred in 1993. Coca-Cola FEMSA listed its L shares on the Mexican Stock Exchange and, in the form of ADS, on the New York Stock Exchange. In 1998, we completed a reorganization that changed our capital structure by converting our outstanding capital stock at the time of the reorganization into BD Units and B Units, and united the shareholders of FEMSA and the former shareholders of Grupo Industrial Emprex, S.A. de C.V. (which we refer to as Emprex) at the same corporate level through an exchange offer that was consummated on May 11, 1998. As part of the reorganization, FEMSA listed ADSs on the NYSE representing BD Units, and listed the BD Units and its B Units on the Mexican Stock Exchange. In May 2003, our subsidiary Coca-Cola FEMSA expanded its operations throughout Latin America by acquiring 100% of Panamerican Beverages, Inc., which we refer to as Panamco, then the largest soft drink bottler in Latin America in terms of sales volume in 2002. Through its acquisition of Panamco, Coca-Cola FEMSA began producing and distributingCoca-Cola trademark beverages in additional territories in Mexico, Central America, Colombia, Venezuela and Brazil, along with bottled water, beer and other beverages in some of these territories. The Coca-Cola Company and its subsidiaries received Series D Shares in exchange for their equity interest in Panamco of approximately 25%. In April 2008, FEMSA shareholders approved a proposal to amend our bylaws in order to preserve the unit structure for our shares that has been in place since May 1998, and to maintain our existing share structure beyond May 11, 2008. Our bylaws previously provided that on May 11, 2008 our Series D-B Shares would convert into Series B Shares and our Series D-L Shares would convert into Series L Shares with limited voting rights. In addition, our bylaws provided that, on May 11, 2008, our current unit structure would cease to exist and each of our B Units would be unbundled into five Series B Shares, while each BD Unit would unbundle into three Series B Shares and two newly issued Series L Shares. Following the April 22, 2008 shareholder approvals, the automatic conversion of our share and unit structures no longer exist, and, absent shareholder action, our share structure will continue to be comprised of Series B Shares, which must represent not less than 51% of our outstanding capital stock, and Series D-B and Series D-L Shares, which together may represent up to 49% of our outstanding capital stock. Our Unit structure, absent shareholder action, will continue to consist of B Units, which bundle five Series B Shares, and BD Units, which bundle one Series B Share, two Series D-B Shares and two Series D-L Shares. See “Item 9. The Offer and Listing—Description of Securities.” In January 2010, FEMSA announced that its Board of Directors unanimously approved a definitive agreement under which FEMSA would exchange its FEMSA Cerveza business for a 20% economic interest in Heineken, one of the world’s leading brewers. In April 2010, FEMSA announced the closing of the transaction, after Heineken N.V., Heineken Holding N.V. and FEMSA held their corresponding AGMs and approved the transaction. Under the terms of the agreement, FEMSA received 43,018,320 shares of Heineken Holding N.V. and 43,009,699 shares of Heineken N.V., with an additional 29,172,504 shares of Heineken N.V. (which shares we refer to as the Allotted Shares) delivered pursuant to an allotted share delivery instrument, or the ASDI. Heineken also assumed US$ 2.1 billion of indebtedness, including FEMSA Cerveza’s unfunded pension obligations. The Allotted Shares were delivered to FEMSA in several installments during 2010 and 2011, with the final installment delivered on October 5, 2011. As of December 31, 2014, FEMSA’s interest in Heineken N.V. represented 12.53% of Heineken N.V.’s outstanding capital and 14.94% of Heineken Holding N.V.’s outstanding capital, resulting in our 20% economic interest in the Heineken Group. The principal terms of the Heineken transaction documents are summarized below in “Item 10. Additional Information—Material Contracts.” In 2012, Coca-Cola FEMSA began the construction of a production plant in Minas Gerais, Brazil, which was completed and began operations in November 2014. This project required an investment of R$584 million Brazilian reais (equivalent to approximately US$ 260 million). It is expected that the plant will generate approximately 700 direct and indirect jobs. The plant is located on a parcel of land 320,000 square meters in size, and it is expected that by the end of 2015 the annual production capacity will be approximately 1.2 billion liters of sparkling beverages (or approximately 200 million unit cases), representing an increase of approximately 62% as compared to the current installed capacity of Coca-Cola FEMSA’s plant in Belo Horizonte, Brazil. In May 2012, Coca-Cola FEMSA closed its merger with Grupo Fomento Queretano, with operations mainly in the state of Querétaro, as well as in parts of the states of Mexico, Hidalgo, and Guanajuato. On September 24, 2012, FEMSA signed definitive agreements to sell its wholly owned subsidiary Industria Mexicana de Quimicos, S.A. de C.V. (which we refer to as Quimiproductos) to a Mexican subsidiary of Ecolab Inc. (NYSE: ECL). Quimiproductos manufactures and provides cleaning and sanitizing products and services related to food and beverage industrial processes, as well as water treatment. The transaction is consistent with FEMSA’s long-standing strategy to divest non-core businesses. Quimiproductos was sold on December 31, 2012, resulting in a gain of Ps. 871 million. In 2013, Coca-Cola FEMSA began the construction of a production plant in Tocancipá, Colombia, which was completed and began operations in February 2015. This project required an investment of 382 billion Colombian pesos (approximately US$ 194 million). Coca-Cola FEMSA expects that the plant will generate approximately 800 direct and indirect jobs. Certain permits are currently in process of being obtained, andCoca-Cola FEMSA expects to obtain these pending permits during 2015. Coca-Cola FEMSA is currently operating with water provided by the municipality, as an alternative source. The plant is located on a parcel of land 298,000 square meters in size, and it is expected that by the end of 2015, the annual production capacity will be approximately 730 million liters of sparkling beverages (or approximately 130 million unit cases), representing an increase of approximately 24% as compared to the current installed capacity of Coca-Cola FEMSA’s plants in Colombia. On January 25, 2013, Coca-Cola FEMSA closed the transaction with The Coca-Cola Company to acquire a 51% non-controlling majority stake in CCFPI for US$ 688.5 million (Ps. 8,904 million) in an all-cash transaction. Coca-Cola FEMSA has an option to acquire the remaining 49% stake in CCFPI at any time during the seven years following the closing date. Coca-Cola FEMSA also has a put option to sell its ownership in CCFPI to The Coca-Cola Company commencing on the fifth anniversary of the closing date and ending on the sixth anniversary of the closing date. Coca-Cola FEMSA currently manages the day-to-day operations of the business; however, during a four-year period ending January 25, 2017 the business plan and other operational decisions must be approved jointly with The Coca-Cola Company. Coca-Cola FEMSA currently recognizes the results of CCFPI using the equity method. In May 2013, Coca-Cola FEMSA closed its merger with Grupo Yoli, one of the oldest family-owned Coca-Cola bottlers in Mexico, operating mainly in the state of Guerrero as well as in parts of the state of Oaxaca. On May 2, 2013, FEMSA Comercio through one of its subsidiaries, Cadena Comercial de Farmacias, S.A.P.I. de C.V. (which we refer to as CCF), closed the acquisition of Farmacias YZA, a leading drugstore operator in Southeast Mexico, headquartered in Merida, Yucatan. The founding shareholders of Farmacias YZA hold a 25% stake in CCF. In a separate transaction, on May 13, 2013, CCF acquired Farmacias FM Moderna, a leading drugstore operator in the western state of Sinaloa. In August 2013, Coca-Cola FEMSA closed its acquisition of Companhia Fluminense de Refrigerantes (which we refer to as Companhia Fluminense), a family owned franchise that operates in parts of the states of São Paulo, Minas Gerais and Rio de Janeiro in Brazil. Companhia Fluminense sold approximately 56.6 million unit cases (including beer) in the twelve months ended March 31, 2013. In October 2013, the Board of Directors agreed to separate the roles of Chairman of the Board and Chief Executive Officer, ratifying José Antonio Fernández Carbajal as Executive Chairman of the Board and naming Carlos Salazar Lomelín as the new Chief Executive Officer of FEMSA. In October 2013, Coca-Cola FEMSA closed its acquisition of Spaipa, the second largest family owned franchise in Brazil, with operations in the state of Paraná and In December 2013, FEMSA Comercio, through one of its subsidiaries, purchased the operating assets and trademarks of Doña Tota, a leading quick-service restaurant operator in Mexico. The founding shareholders of Doña Tota hold a 20% stake in the FEMSA Comercio subsidiary that now operates the Doña Tota business. In December 2014, FEMSA Comercio through CCF, agreed to acquire 100% of Farmacias Farmacón, a regional pharmacy chain consisting of 213 stores in the northwestern Mexican states of Sinaloa, Sonora, Baja California and Baja California Sur. The transaction is pending customary regulatory approvals, and is expected to close during the second quarter of 2015. For more information on Coca-Cola FEMSA’s recent transactions, see“Item 4. Information on the Company—Coca-Cola FEMSA.”
We conduct our business through our principal sub-holding companies as shown in the following diagram and table: Principal Sub-holding Companies—Ownership Structure As of March 31, 2015
The following table presents an overview of our operations by reportable segment and by geographic area: Operations by Segment—Overview Year Ended December 31, 2014 and % of growth (decrease) vs. last year (in million of Mexican pesos, except for employees and percentages)
Total Revenues Summary by Segment(1)
Total Revenues Summary by Geographic Area(1)
The following table sets forth our
FEMSA is a leading company that participates in the beverage industry through Coca-Cola FEMSA, the largest franchise bottler of Coca-Cola products in the world; and in the beer industry, through its ownership of the second largest equity stake in Heineken, one of the world’s leading brewers with operations in over 70 countries. In the retail industry FEMSA participates with FEMSA Comercio, operating various small-format store chains including OXXO, the largest and fastest-growing in the Americas. Additionally, through its strategic businesses, FEMSA provides logistics, point-of-sale refrigeration solutions and plastics solutions to FEMSA’s business units and third-party clients. We understand the importance of connecting with our end consumers by interpreting their needs, and ultimately delivering the right products to them for the right occasions and the optimal value proposition. We strive to achieve this by developing brand value, expanding our significant distribution capabilities, and improving the efficiency of our operations while aiming to reach our full potential. We continue to improve our information gathering and processing systems in order to better know and understand what our consumers want and need, and we are improving our production and distribution by more efficiently leveraging our asset base. We believe that the competencies that our businesses have developed can be replicated in other geographic regions. This underlying principle guided our consolidation efforts, which led to our current continental footprint. We have presence in Mexico, Central and South America and the Philippines including some of the most populous metropolitan areas in Latin America—which has provided us with opportunities to create value through both an improved ability to execute our strategies and the use of superior marketing tools. We have also increased our capabilities to operate and succeed in other geographic regions, by developing management to gain an understanding of local consumer needs. Going forward, we intend to use those capabilities to continue our international expansion of both Coca-Cola FEMSA and FEMSA Comercio, expanding both our geographic footprint and our presence in the non-alcoholic beverage industry and small box retail formats, as well as taking advantage of potential opportunities to leverage our skill set and key competencies. Our objective is to create economic, social and environmental value for our stakeholders—including our employees, our consumers, our shareholders and the enterprises and institutions within our society—now and into the future. Overview Coca-Cola FEMSA is the largest franchise bottler ofCoca-Colatrademark beverages in the world. It operates in territories in the following countries: Mexico – a substantial portion of central Mexico, the southeast and northeast of Mexico (including the Gulf region). Central America – Guatemala (Guatemala City and surrounding areas), Nicaragua (nationwide), Costa Rica (nationwide) and Panama (nationwide). Colombia – most of the country. Venezuela – nationwide. Brazil – a major part of the states of São Paulo and Minas Gerais, the states of Paraná and Mato Grosso do Sul and part of the states of Rio de Janeiro and Goiás. Argentina – Buenos Aires and surrounding areas. Philippines – nationwide (through a joint venture with The Coca-Cola Company). Coca-Cola FEMSA was incorporated on October 30, 1991 as a stock corporation with variable capital (sociedad anónima de capital variable) under the laws of Mexico for a term of 99 years. On December 5, 2006, as required by amendments to the Mexican Securities Market Law, Coca-Cola FEMSA became a publicly traded stock corporation with variable capital (sociedad anónima bursátil de capital variable). Coca-Cola FEMSA’s legal name is Coca-Cola FEMSA, S.A.B. de C.V. Coca-Cola FEMSA’s principal executive offices are located at Calle Mario Pani No. 100, Colonia Santa Fe Cuajimalpa, Delegación Cuajimalpa de Morelos, 05348, México, D.F., México. Coca-Cola FEMSA’s telephone number at this location is (52-55) 1519-5000. Coca-Cola FEMSA’s website iswww.coca-colafemsa.com. The following Operations by Consolidated Reporting Segment—Overview Year Ended December 31,
Corporate History Coca-Cola FEMSA commenced operations in 1979, when one of our subsidiaries acquired certain sparkling beverage bottlers. In 1991, we transferred our ownership in the bottlers to FEMSA Refrescos, S.A. de C.V., the corporate predecessor to Coca-Cola FEMSA, S.A.B. de C.V. In June 1993, a subsidiary of The Coca-Cola Company subscribed for 30% of Coca-Cola FEMSA’s capital stock in the form of Series D shares. In September 1993, we sold Series L shares that represented 19.0% of Coca-Cola FEMSA’s capital stock to the public, and Coca-Cola FEMSA listed these shares on the Mexican Stock Exchange and, in the form of ADSs, on the New York Stock Exchange. In a series of transactions since 1994, Coca-Cola FEMSA has acquired new territories, brands and other businesses which today comprise Coca-Cola FEMSA’s business. In May 2003, Coca-Cola FEMSA acquired Panamco and began producing and distributingCoca-Colatrademark beverages in additional territories in the central and gulf regions of Mexico and in Central America (Guatemala, Nicaragua, Costa Rica and Panama), Colombia, Venezuela and Brazil, along with bottled water, beer and other beverages in some of these territories. In November 2006, we acquired 148,000,000 of Coca-Cola FEMSA’s Series D shares from certain subsidiaries of The Coca-Cola Company, which increased our ownership of Coca-Cola FEMSA to 53.7%. In November 2007, Coca-Cola FEMSA acquired together with The Coca-Cola Company 100% of the shares of capital stock of Jugos del Valle, S.A.P.I. de C.V., or Jugos del Valle. In 2008, Coca-Cola FEMSA, The Coca-Cola Company and all Mexican and BrazilianCoca-Cola bottlers entered into a joint business for the Mexican and Brazilian operations, respectively, of Juegos del Valle. In December 2007 and May 2008, Coca-Cola FEMSA sold most of its proprietary brands to The Coca-Cola Company. The proprietary brands are now being licensed back to Coca-Cola FEMSA by The Coca-Cola Company pursuant to its bottler agreements. In May 2008, Coca-Cola FEMSA entered into a transaction with The Coca-Cola Company to acquire its wholly owned bottling franchise Refrigerantes Minas Gerais, Ltda., or REMIL, located in the State of Minas Gerais in Brazil. In July 2008, Coca-Cola FEMSA acquired the Agua De Los Angeles bulk water business in the Valley of Mexico (Mexico City and surrounding areas) from Grupo Embotellador CIMSA, S.A. de C.V., at the time one of the Coca-Cola bottling franchises in Mexico. The trademarks remain with The Coca-Cola Company. Coca-Cola FEMSA subsequently merged Agua De Los Angeles into its bulk water business under theCielbrand. In February 2009, Coca-Cola FEMSA together with The Coca-Cola Company acquired the Brisa bottled water business in Colombia from Bavaria, S.A., a subsidiary of SABMiller plc. Coca-Cola FEMSA acquired the production assets and the distribution territory and The Coca-Cola Company acquired theBrisa brand. In May 2009, Coca-Cola FEMSA entered into an agreement to manufacture, distribute and sell theCrystal trademark water products in Brazil jointly with The Coca-Cola Company. In August 2010, Coca-Cola FEMSA acquired from The Coca-Cola Company along with other Brazilian Coca-Cola bottlers Leão Alimentos e Bebidas, Ltda. or Leão Alimentos, manufacturer and distributor of theMatte Leão tea brand. In March 2011, Coca-Cola FEMSA together with The Coca-Cola Company acquired Grupo Industrias Lacteas, S.A. (also known as Estrella Azul), a Panamanian conglomerate that participates in the dairy and juice-based beverage categories in Panama. In October 2011, Coca-Cola FEMSA merged with Grupo Tampico, one of the largest family-ownedCoca-Cola bottlers in Mexico in terms of sales volume with operations in the states of Tamaulipas, San Luis Potosí, and Veracruz, as well as in parts of the states of Hidalgo, Puebla and Queretaro. In December 2011, Coca-Cola FEMSA merged with Grupo CIMSA and its shareholders, a Mexican family-ownedCoca-Cola bottler with operations mainly in the states of Morelos and Mexico, as well as in parts of the states of Guerrero and Michoacán. As part of its merger with Grupo CIMSA, Coca-Cola FEMSA also acquired a 13.2% equity interest in Promotora Industrial Azucarera, S.A de C.V., or PIASA. In May 2012, Coca-Cola FEMSA merged with Grupo Fomento Queretano, one of the oldest family-owned beverage players in theCoca-Cola system in Mexico, with operations mainly in the state of Querétaro, as well as in parts of the states of Mexico, Hidalgo and Guanajuato. For further information, see Note 4 to our audited consolidated financial statements. As part of Coca-Cola FEMSA’s merger with Grupo Fomento Queretano it also acquired an additional 12.9% equity interest in PIASA. In August 2012, Coca-Cola FEMSA acquired, through Jugos del Valle, an indirect participation in Santa Clara Mercantil de Pachuca, S.A. de C.V., or Santa Clara, a producer of milk and dairy products in Mexico. In January 2013, Coca-Cola FEMSA together with The Coca-Cola Company acquired a 51% non- controlling majority stake in CCFPI in an all-cash transaction. In May 2013, Coca-Cola FEMSA merged with Grupo Yoli, one of the oldest family-owned Coca-Cola bottlers in Mexico, with operations mainly in the state of Guerrero as well as in parts of the state of Oaxaca. For further information, see Note 4 to our audited consolidated financial statements. As part of its merger with Grupo Yoli, Coca-Cola FEMSA also acquired an additional 10.1% equity interest in PIASA for a total ownership of 36.3%. In August 2013, Coca-Cola FEMSA acquired Companhia Fluminense, a family owned franchise that operates in parts of the states of São Paulo, Minas Gerais and Rio de Janeiro in Brazil. For further information, see Note 4 to our audited consolidated financial statements. As part of Coca-Cola FEMSA’s acquisition of Companhia Fluminense, Coca-Cola FEMSA also acquired an additional 1.2% equity interest in Leão Alimentos. In October 2013, Coca-Cola FEMSA acquired Spaipa, the second largest family owned franchise in Brazil, with operations in the state of Paraná and in parts of the state of São Paulo. For further information, see Note 4 to our audited consolidated financial statements. As part of its acquisition of Spaipa, Coca-Cola FEMSA also acquired an additional 5.8% equity interest in Leão Alimentos, for a total ownership as of April 10, 2015 of 24.4%, and a 50.0% stake in Fountain Água Mineral Ltda., a joint venture to develop the water category together with The Coca-Cola Company. For further information see “Item 7. Major Shareholders and Related Party Transactions—Related Party Transactions—Business Transactions between Coca-Cola FEMSA, FEMSA and The Coca-Cola Company.” Capital Stock As of April 17, 2015, we indirectly owned Series A shares equal to 47.9% of Coca-Cola FEMSA’s capital stock (63.0% of Coca-Cola FEMSA’s capital stock with full voting rights). As of April 17, 2015, The Coca-Cola Company indirectly owned Series D shares equal to 28.1% of the capital stock of Coca-Cola FEMSA (37.0% of the capital stock with full voting rights). Series L shares with limited voting rights, which trade on the Mexican Stock Exchange and in the form of ADSs on the New York Stock Exchange, constitute the remaining 24.0% of Coca-Cola FEMSA’s capital stock. Business Strategy Coca-Cola FEMSA operates with a large geographic footprint in Latin America. In January 2015, Coca-Cola FEMSA restructured its operations under four new divisions: (1) Mexico (covering certain territories in Mexico); (2) Latin America (covering certain territories in Guatemala, and all of Nicaragua, Costa Rica and Panama, certain territories in Argentina, most of Colombia and all of Venezuela), (3) Brazil (covering a major part of the states of São Paulo and Minas Gerais, the states of Paraná and Mato Grosso do Sul and part of the states of Rio de Janeiro and Goiás), and (4) Asia (covering all of the Philippines through a joint venture with The Coca-Cola Company). Through these divisions, Coca-Cola FEMSA has created a more flexible structure to execute its strategies and continue with its track record of growth. Coca-Cola FEMSA has also aligned its business strategies more efficiently, ensuring a faster introduction of new products and categories, and a more rapid and effective design and deployment of commercial models. One of Coca-Cola FEMSA’s goals is to maximize growth and profitability to create value for its shareholders. Coca-Cola FEMSA’s efforts to achieve this goal are based on: (1) transforming its commercial models to focus on its customers’ value potential and using a value-based segmentation approach to capture the industry’s value potential; (2) implementing multi-segmentation strategies in its major markets to target distinct market clusters divided by consumption occasion, competitive intensity and socioeconomic levels; (3) implementing well-planned product, packaging and pricing strategies through different distribution channels; (4) driving product innovation along its different product categories; (5) developing new businesses and distribution channels; and (6) achieving the full operating potential of its commercial models and processes to drive operational efficiencies throughout its company. In furtherance of these efforts, Coca-Cola FEMSA intends to continue to focus on, among other initiatives, the following: working with The Coca-Cola Company to develop a business model to continue exploring and participating in new lines of beverages, extending existing product lines and effectively advertising and marketing its products; developing and expanding its still beverage portfolio through innovation, strategic acquisitions and by entering into agreements to acquire companies with The Coca-Cola Company; expanding its bottled water strategy with The Coca-Cola Company through innovation and selective acquisitions to maximize profitability across its market territories; strengthening its selling capabilities and go-to-market strategies, including pre-sale, conventional selling and hybrid routes, in order to get closer to its clients and help them satisfy the beverage needs of consumers;
replicating its best practices throughout the value chain; rationalizing and adapting its organizational and asset structure in order to be in a better position to respond to a changing competitive environment; building a multi-cultural collaborative team, from top to bottom; and broadening its geographic footprint through organic growth and strategic joint ventures, mergers and acquisitions. Coca-Cola FEMSA seeks to increase per capita consumption of its products in the territories in which it operates. To that end, Coca-Cola FEMSA’s marketing teams continuously develop sales strategies tailored to the different characteristics of its various territories and distribution channels. Coca-Cola FEMSA continues to develop its product portfolio to better meet market demand and maintain its overall profitability. To stimulate and respond to consumer demand, Coca-Cola FEMSA continues to introduce new categories, products and presentations.See “—Product and Packaging Mix.” In addition, because Coca-Cola FEMSA views its relationship with The Coca-Cola Company as integral to its business, Coca-Cola FEMSA uses market information systems and strategies developed with The Coca-Cola Company to improve its business and marketing strategies.See “—Marketing.” Coca-Cola FEMSA also continuously seeks to increase productivity in its facilities through infrastructure and process reengineering for improved asset utilization. Coca-Cola FEMSA’s capital expenditure program includes investments in production and distribution facilities, bottles, cases, coolers and information systems. Coca-Cola FEMSA believes that this program will allow it to maintain its capacity and flexibility to innovate and to respond to consumer demand for its products. In early 2015, Coca-Cola FEMSA redesigned its corporate structure to strengthen the core functions of its organization. Through this restructuring, Coca-Cola FEMSA created specialized departments, focused on its supply chain, commercial, and IT innovation areas (centros de excelencia). These departments not only enable centralized collaboration and knowledge sharing, but also drive standards of excellence and best practices in Coca-Cola FEMSA’s key strategic capabilities. Coca-Cola FEMSA’s priorities include enhanced manufacturing efficiency, improved distribution and logistics, and cutting-edge IT-enabled commercial innovation. Coca-Cola FEMSA focuses on management quality as a key element of its growth strategy and remains committed to fostering the development of quality management at all levels. Coca-Cola FEMSA’s Strategic Talent Management Model is designed to enable it to reach its full potential by developing the capabilities of its employees and executives. This holistic model works to build the skills necessary for Coca-Cola FEMSA’s employees and executives to reach their maximum potential, while contributing to the achievement of its short- and long-term objectives. To support this capability development model, Coca-Cola FEMSA’s board of directors has allocated a portion of its yearly operating budget to fund these management training programs. Sustainable development is a comprehensive part of Coca-Cola FEMSA’s strategic framework for business operation and growth. Coca-Cola FEMSA bases its efforts in its core foundation, its ethics and values. Coca-Cola FEMSA focuses on three core areas, (i) its people, by encouraging the comprehensive development of its employees and their families; (ii) its communities, by promoting the generation of sustainable communities in which it serves, an attitude of health, self-care, adequate nutrition and physical activity, and evaluating the impact of its value chain; and (iii) the planet, by establishing guidelines that it believes will result in efficient use of natural resources to minimize the impact that its operations might have on the environment and create a broader awareness of caring for the environment. CCFPI Joint Venture On January 25, 2013, as part of Coca-Cola FEMSA’s efforts to expand its geographic reach, it acquired a 51% non-controlling majority stake in CCFPI. Coca-Cola FEMSA currently manages the day-to-day operations of the business; however, during a four-year period ending January 25, 2017 the business plan and other operational decisions must be approved jointly with The Coca-Cola Company. As of December 31, 2014, Coca-Cola FEMSA’s investment under the equity method in CCFPI was Ps. 9,021 million. See Notes 10 and 26 to our audited consolidated financial statements. Coca-Cola FEMSA’s product portfolio in the Philippines consists ofCoca-Cola trademark beverages and Coca-Cola FEMSA’s total sales volume in 2014 reached 513 million unit cases. The operations of CCFPI are comprised of 19 production plants and serve close to 853,242 customers. The Philippines has one of the highest per capita consumption rates ofCoca-Cola products in the region and presents significant opportunities for further growth.Coca-Cola has been present in the Philippines since the start of the 20th century and since 1912 it has been locally producingCoca-Colaproducts. The Philippines received the first Coca-Cola bottling and distribution franchise in Asia. Coca-Cola FEMSA’s strategic framework for growth in the Philippines is based on three pillars: portfolio, route to market and supply chain. Coca-Cola FEMSA’s Territories The following map shows Coca-Cola FEMSA’s territories, giving estimates in each case of the population to which it offer products, the number of retailers of its beverages and the per capita consumption of its beverages as of December 31, 2014: Per capita consumption data for a territory is determined by dividing total beverage sales volume within the territory (in unit cases) by the estimated population within such territory, and is expressed on the basis of the number of eight-ounce servings of Coca-Cola FEMSA’s products consumed annually per capita. In evaluating the development of local volume sales in Coca-Cola FEMSA’s territories and to determine product potential, Coca-Cola FEMSA and The Coca-Cola Company measure, among other factors, the per capita consumption of all their beverages. Coca-Cola FEMSA’s Products Coca-Cola FEMSA produces, markets, sells and distributesCoca-Cola trademark beverages. TheCoca-Cola trademark beverages include: sparkling beverages (colas and flavored sparkling beverages), waters and still beverages (including juice drinks, coffee, teas, milk, value-added dairy and isotonic drinks). The following table sets forth Coca-Cola FEMSA’s main brands as of December 31, 2014:
Sales Overview
Product and Packaging Mix Out of the more than 116 brands and line extensions of beverages that Coca-Cola FEMSA
presentations, which allow it to offer portfolio alternatives based on convenience and affordability to implement revenue management strategies and to target specific distribution channels and population segments in
fountain. Coca-Cola FEMSA
The characteristics of Coca-Cola FEMSA’s territories are very diverse. Central Mexico and Coca-Cola FEMSA’s territories in The following discussion analyzes Coca-Cola FEMSA’s product and packaging mix by its consolidated reporting segments. The volume data presented is for the years 2014, 2013 and 2012.
The following table highlights historical sales volume and mix in Mexico and Central America for Coca-Cola FEMSA’s products:
In 2014, multiple serving presentations represented 64.5% of total sparkling beverages sales volume in Mexico, a 170 basis points decrease compared to 2013; and 54.7% of total sparkling beverages sales volume in Central America, a 16 basis points decrease compared to 2013. Coca-Cola FEMSA’s strategy is to foster consumption of single serve presentations while maintaining multiple serving volumes. In 2014, returnable packaging, as a percentage of total sparkling beverage sales volume accounted for 37.9% in Mexico, a 290 basis points increase as compared to 2013; and 34.8% in Central America, a 1,160 basis points increase as compared to 2013. In 2014, Coca-Cola FEMSA’s sparkling beverages volume as a percentage of total sales volume in its Mexico and Central America division increased marginally to 73.2% as compared with 2013. Total sales volume in Coca-Cola FEMSA’s Mexico and Central America division (including Grupo Yoli) reached In 2013, multiple serving presentations represented 66.2% of total sparkling beverages sales volume in Mexico (including Grupo Fomento Queretano and Grupo Yoli), a 10 basis points decrease compared to 2012; and 56.3% of total sparkling beverages sales volume in Central America, a 50 basis points increase compared to 2012. In 2013, returnable packaging, as a percentage of total sparkling beverage sales volume, accounted for 35.0% in Mexico (including Grupo Fomento Queretano and Grupo Yoli), a 160 basis points increase compared to 2012; and 23.2% in Central America, a 160 basis points decrease compared to 2012. In 2013, Coca-Cola FEMSA’s sparkling beverages volume as a percentage of total sales volume in its Mexico and Central America division (including Grupo Fomento Queretano and Grupo Yoli) increased marginally to 73.1% as compared with 2012. Total sales volume in Coca-Cola FEMSA’s Mexico and Central America division (including Grupo Fomento Queretano and Grupo Yoli) reached 1,953.6 million unit cases in 2013, an increase of South America (Excluding Venezuela). Coca-Cola FEMSA’s product portfolio in South America consists mainly of During 2013, as part of Coca-Cola FEMSA’s efforts to foster sparkling beverage per capita consumption in Brazil, it reinforced the 2.0-liter returnable plastic bottle for theCoca-Cola brand and introduced two single-serve 0.2 and 0.3 liter presentations. During 2014, in an effort to increase sales in its still beverage portfolio in the region, Coca-Cola FEMSA reinforced itsJugos del Valle line of business andPoweradebrand. Per capita consumption of Coca-Cola FEMSA’s beverages in Colombia, Brazil and Argentina was 152.7, 244.2 and 470.4 eight-ounce servings, respectively, in 2014. The following table highlights historical total sales volume and sales volume mix in South America (excluding Venezuela), not including beer:
Total sales volume in Coca-Cola FEMSA’s South America division, excluding Venezuela, increased 22.6% to 1,257.7 million unit cases in 2014 as compared to 2013, as a result of stronger sales volumes in its recently integrated territories in Brazil and better volume performance in Colombia. The still beverage category grew 31.8%, mainly driven by the Jugos del Valle line of business in In 2014, returnable packaging, as a percentage of Total sales volume in Coca-Cola FEMSA’s South America division, excluding Venezuela, increased 6.3% to 1,028.1 million unit
Coca-Cola FEMSA Venezuela. Coca-Cola FEMSA’s product portfolio in Venezuela consists ofCoca-Cola trademark beverages. Per capita consumption of Coca-Cola FEMSA’s beverages in Venezuela during 2014 was 190.0 eight-ounce servings. At the end of 2011, Coca-Cola FEMSA launchedDel Valle Fresh, an orangeade, in Venezuela, which contributed significantly to incremental volume growth in this country during 2012. During 2014, Coca-Cola FEMSA’s Poweradebrand in the country contributed to its sales growth in the still beverage category. The following table highlights historical total sales volume and sales volume mix in Venezuela:
Coca-Cola FEMSA has implemented a product portfolio rationalization strategy that allows it to minimize the impact of certain operating disruptions that have been recurrent in Venezuela over the last several years related to difficulties in accessing raw materials due to the delay in obtaining the corresponding import authorizations. In addition, from time to time, Coca-Cola FEMSA experiences operating disruptions due to prolonged negotiations of collective bargaining agreements. Despite these difficulties, total sales volume increased 8.2% to 241.1 million unit cases in 2014, as compared to 222.9 million unit cases in 2013. The sales volume in the sparkling beverage category grew 8.3%, driven by the strong performance of theCoca-Cola brand, which grew 15.3%. The bottled water business, including bulk water, grew 1.6% mainly driven by theNevada brand. The still beverage category increased 10.8%, due to the performance of theDel Valle Fresh orangeade andPoweradebrand. In 2014, multiple serving presentations represented 81.9% of total sparkling beverages sales volume in Venezuela, a 100 basis points increase as compared to 2013. In 2014, returnable presentations represented 6.9% of total sparkling beverages sales volume in Venezuela, a 20 basis points increase as compared to 2013. Total In 2013, multiple serving presentations represented 80.9% of total sparkling beverages sales volume in Venezuela, a 100 basis points increase compared to 2012. In 2013, returnable presentations represented 6.8% of total sparkling beverages sales volume in Venezuela, an 80 basis points decrease compared to 2012. Seasonality Sales of Coca-Cola FEMSA’s products are seasonal, as its sales levels generally increase during the summer months of each country and during the Christmas holiday season. In Mexico, Central America, Colombia and Venezuela, Coca-Cola FEMSA typically achieves its highest sales during the summer months of April through September as well as during the Christmas holidays in December. In Brazil and Argentina, Coca-Cola FEMSA’s highest sales levels occur during the summer months of October through March and the Christmas holidays in December. Marketing Coca-Cola FEMSA, in conjunction with The Coca-Cola Company, has developed a marketing strategy to promote the sale and consumption of its products. Coca-Cola FEMSA relies extensively on advertising, sales promotions and retailer support programs to target the particular preferences of its consumers. Coca-Cola FEMSA’s consolidated marketing expenses in 2014, net of contributions by The Coca-Cola Company, were Ps. 3,488 million. The Coca-Cola Company contributed an additional Ps. 4,118 million in 2014, which mainly includes contributions for coolers, bottles and cases. Through the use of advanced information technology, Coca-Cola FEMSA has collected customer and consumer information that allow it to tailor its marketing strategies to target different types of customers located in each of its territories and to meet the specific needs of the various markets it serves. Retailer Support Programs. Support programs include providing retailers with point-of-sale display materials and consumer sales promotions, such as contests, sweepstakes and the giveaway of product samples. Coolers. Coolers play an integral role in Coca-Cola FEMSA’s clients’ plans for success. Increasing both cooler coverage and the number of cooler doors among its retailers is important to ensure that Coca-Cola FEMSA’s wide variety of products are properly displayed, while strengthening its merchandising capacity in the traditional sales channel to significantly improve its point-of-sale execution. Advertising. Coca-Cola FEMSA advertises in all major communications media. Coca-Cola FEMSA focuses its advertising efforts on increasing brand recognition by consumers and improving its customer relations. National advertising campaigns are designed and proposed by The Coca-Cola Company’s local affiliates in the countries in which Coca-Cola FEMSA operates, with Coca-Cola FEMSA’s input at the local or regional level. Point-of-sale merchandising and advertising efforts are proposed and implemented by Coca-Cola FEMSA, with a focus on increasing its connection with customers and consumers. Channel Marketing. In order to provide more dynamic and specialized marketing of its products, Coca-Cola FEMSA’s strategy is to classify its markets and develop targeted efforts for each consumer segment or distribution channel. Coca-Cola FEMSA’s principal channels are small retailers, “on-premise” consumption such as restaurants and bars, supermarkets and third party distributors. Presence in these channels entails a comprehensive and detailed analysis of the purchasing patterns and preferences of various groups of beverage consumers in each of the different types of locations or distribution channels. In response to this analysis, Coca-Cola FEMSA tailors its product, price, packaging and distribution strategies to meet the particular needs of and exploit the potential of each channel. Multi-Segmentation. Coca-Cola FEMSA has implemented a multi-segmentation strategy in all of its markets. These strategies consist of the implementation of different product/price/package portfolios by market cluster or group. These clusters are defined based on consumption occasion, competitive intensity and socio-economic levels, rather than solely on the types of distribution channels. Client Value Management. Coca-Cola FEMSA continues transforming its commercial models to focus on its customers’ value potential using a value-based segmentation approach to capture the industry’s potential. Coca-Cola FEMSA started the rollout of this new model in its Mexico, Central America, Colombia and Brazil operations in 2009. As of the end of 2014, Coca-Cola FEMSA has covered the totality of the volumes in every operation except for Venezuela (where Coca-Cola FEMSA has partially covered the volumes) and the recently integrated franchises of Companhia Fluminense and Spaipa in Brazil. Coca-Cola FEMSA believes that the implementation of these strategies described above also enables it to respond to competitive initiatives with channel-specific responses as opposed to market-wide responses. In addition, it allows Coca-Cola FEMSA to be more efficient in the way it goes to market and invests its marketing resources in those segments that could provide a higher return. Coca-Cola FEMSA’s marketing, segmentation and distribution activities are facilitated by its management information systems. Coca-Cola FEMSA has invested significantly in creating these systems, including in hand-held computers to support the gathering of product, consumer and delivery information for most of the sales routes throughout its territories. Product Sales and Distribution The following table provides an overview of Coca-Cola FEMSA’s distribution centers and the retailers to which it sells its products:
Coca-Cola FEMSA continuously evaluates its distribution model in order to fit with the local dynamics of the marketplace and analyze the way it goes to market, recognizing different service needs from its customers, while looking for a more efficient distribution model. As part of this strategy, Coca-Cola FEMSA is rolling out a variety of new distribution models throughout its territories looking for improvements in its distribution network. Coca-Cola FEMSA uses several sales and distribution models depending on market, geographic conditions and the customer’s profile: (1) the pre-sale system, which separates the sales and delivery functions, permitting trucks to be loaded with the mix of products that retailers have previously ordered, thereby increasing both sales and distribution efficiency, (2) the conventional truck route system, in which the person in charge of the delivery makes immediate sales from inventory available on the truck, (3) a hybrid distribution system, where the same truck carries product available for immediate sale and product previously ordered through the pre-sale system, (4) the telemarketing system, which could be combined with pre-sales visits and (5) sales through third-party wholesalers of Coca-Cola FEMSA’s products. As part of the pre-sale system, sales personnel also provide merchandising services during retailer visits, which Coca-Cola FEMSA believes enhance the shopper experience at the point of sale. Coca-Cola FEMSA believes that an adequate number of service visits to retailers and frequency of deliveries are essential elements in an effective selling and distribution system for its products. Coca-Cola FEMSA’s distribution centers range from large warehousing facilities and re-loading centers to small deposit centers. In addition to Coca-Cola FEMSA’s fleet of trucks, Coca-Cola FEMSA distributes its products in certain locations through electric carts and hand-trucks in order to comply with local environmental and traffic regulations. In some of Coca-Cola FEMSA’s territories, it retains third parties to transport its finished products from the bottling plants to the distribution centers. Mexico. Coca-Cola FEMSA contracts with one of our subsidiaries for the transportation of finished products to its distribution centers from its production facilities. From the distribution centers, Coca-Cola FEMSA then distributes its finished products to retailers through its own fleet of trucks. In Mexico, Coca-Cola FEMSA sells a majority of its beverages at small retail stores to consumers who may take the beverages for consumption at home or elsewhere. Coca-Cola FEMSA also sells products through the “on-premise” consumption segment, supermarkets and other locations. The “on-premise” consumption segment consists of sales through sidewalk stands, restaurants, bars and various types of dispensing machines as well as sales through point-of-sale programs in stadiums, concert halls, auditoriums and theaters. Brazil. In Brazil, Coca-Cola FEMSA sold 33% of its total sales volume through modern distribution channels in 2014. Also in Brazil, Coca-Cola FEMSA distributes its finished products to retailers through a combination of its own fleet of trucks and third party distributors, while Coca-Cola FEMSA maintains control over the selling function. In designated zones in Brazil, third-party distributors purchase its products at a discount from the wholesale price and resell the products to retailers. Territories other than Mexico and Brazil. Coca-Cola FEMSA distributes its finished products to retailers through a combination of its own fleet of trucks and third party distributors. In most of Coca-Cola FEMSA’s territories, an important part of its total sales volume is sold through small retailers, with low supermarket penetration. Competition Although Coca-Cola FEMSA believes that its products enjoy wider recognition and greater consumer loyalty than those of its principal competitors, the markets in the territories in which Coca-Cola FEMSA operates are highly competitive. Coca-Cola FEMSA’s principal competitors are localPepsi bottlers and other bottlers and distributors of national and regional beverage brands. Coca-Cola FEMSA faces increased competition in many of its territories from producers of low price beverages, commonly referred to as “B brands.” A number of Coca-Cola FEMSA’s competitors in Central America, Venezuela, Brazil and Argentina offer beer in addition to sparkling beverages, still beverages, and water, which may enable them to achieve distribution efficiencies. Price discounting and packaging have joined consumer sales promotions, customer service and non-price retailer incentives as the primary means of competition among bottlers. Coca-Cola FEMSA competes by seeking to offer products at an attractive price in the different segments in its markets and by building on the value of its brands. Coca-Cola FEMSA believes that the introduction of new products and new presentations has been a significant competitive technique that allows it to increase demand for its products, provide different options to consumers and increase new consumption opportunities.See “—Product and Packaging Mix.” Mexico and Central America. Coca-Cola FEMSA’s principal competitors in Mexico are bottlers ofPepsi products, whose territories overlap but are not co-extensive with its own. Coca-Cola FEMSA competes with Organización Cultiba, S.A.B. de C.V., a joint venture formed by Grupo Embotelladoras Unidas, S.A.B. de C.V., the formerPepsi bottler in central and southeast Mexico, a subsidiary of PepsiCo, and Empresas Polar, S.A., the leading beer distributor andPepsi bottler in Venezuela. Coca-Cola FEMSA’s main competition in the juice category in Mexico is Grupo Jumex. In the water category,Bonafont, a water brand owned by Grupo Danone, is Coca-Cola FEMSA’s main competition. In addition, Coca-Cola FEMSA competes with Cadbury Schweppes in sparkling beverages and with other national and regional brands in its Mexican territories, as well as “B brand” producers, such as Ajemex, S.A. de C.V. and Consorcio AGA, S.A. de C.V., that offer various presentations of sparkling and still beverages. In the countries that comprise Coca-Cola FEMSA’s Central America region, its main competitors arePepsi andBig Cola bottlers. In Guatemala and Nicaragua, Coca-Cola FEMSA competes with a joint venture between AmBev and The Central American Bottler Corporation. In Costa Rica, Coca-Cola FEMSA’s principal competitor is Florida Bebidas S.A., subsidiary of Florida Ice and Farm Co. In Panama, Coca-Cola FEMSA’s main competitor is Cervecería Nacional, S.A. Coca-Cola FEMSA also faces competition from “B brands” offering multiple serving size presentations in some Central American countries. South America (excluding Venezuela). Coca-Cola FEMSA’s principal competitor in Colombia is Postobón, a well-established local bottler that sells flavored sparkling beverages (under the brandsPostobón andColombiana), some of which have a wide consumption preference, such asmanzana Postobón (apple Postobón), which is the second most popular flavor in the Colombian sparkling beverage industry in terms of total sales volume. Postobón also sellsPepsi products. Postobón is a vertically integrated producer, the owners of which hold other significant commercial interests in Colombia. Coca-Cola FEMSA also competes with low-price producers, such as the producers ofBig Cola, which principally offer multiple serving size presentations in the sparkling and still beverage industry. In Brazil, Coca-Cola FEMSA competes against AmBev, a Brazilian company with a portfolio of brands that includesPepsi, local brands with flavors such as guaraná, and proprietary beer brands. Coca-Cola FEMSA also competes against “B brands” or “Tubainas,” which are small, local producers of low-cost flavored sparkling beverages that represent a significant portion of the sparkling beverage market. In Argentina, Coca-Cola FEMSA’s main competitor is Buenos Aires Embotellador S.A., or BAESA, aPepsi bottler, which is owned by Argentina’s principal brewery, Quilmes Industrial S.A., and indirectly controlled by AmBev. In addition, Coca-Cola FEMSA competes with a number of competitors offering generic, low-priced sparkling beverages as well as many other generic products and private label proprietary supermarket brands. Venezuela. In Venezuela, Coca-Cola FEMSA’s main competitor is Pepsi-Cola Venezuela, C.A., a joint venture formed between PepsiCo and Empresas Polar, S.A., the leading beer distributor in the country. Coca-Cola FEMSA also competes with the producers ofBig Cola in part of this country. Raw Materials Pursuant to its bottler agreements, Coca-Cola FEMSA is authorized to manufacture, sell and distributeCoca-Cola trademark beverages within specific geographic areas, and Coca-Cola FEMSA is required to purchase in all of its territories for allCoca-Cola trademark beverages concentrate from companies designated by The Coca-Cola Company and sweeteners from companies authorized by The Coca-Cola Company. Concentrate prices forCoca-Cola trademark beverages are determined as a percentage of the weighted average retail price in local currency net of applicable taxes. Although The Coca-Cola Company has the right to unilaterally set the price of concentrates, in practice this percentage has historically been set pursuant to periodic negotiations with The Coca-Cola Company. In the past, The Coca-Cola Company has increased concentrate prices forCoca-Cola trademark beverages in some of the countries in which Coca-Cola FEMSA operates. In 2014, The Coca-Cola Company informed Coca-Cola FEMSA that it will gradually increase concentrate prices for certainCoca-Cola trademark beverages over a five year period in Costa Rica and Panama beginning in 2014. Based on Coca-Cola FEMSA’s estimates, it currently does not expect these increases to have a material adverse effect on its results of operation. Most recently, The Coca-Cola Company also informed Coca-Cola FEMSA that it will gradually increase concentrate prices for flavored water over a four year period in Mexico beginning in April 2015. The Coca-Cola Company may unilaterally increase concentrate prices again in the future and Coca-Cola FEMSA may not be successful in negotiating or implementing measures to mitigate the negative effect this may have in the prices of its products or its results.See “Item 10. Additional Information—Material Contracts—Material Contracts Relating to Coca-Cola FEMSA—Cooperation Framework with The Coca-Cola Company.” In addition to concentrate, Coca-Cola FEMSA purchases sweeteners, carbon dioxide, resin and preforms to make plastic bottles, finished plastic and glass bottles, cans, caps and fountain containers, as well as other packaging materials and raw materials. Sweeteners are combined with water to produce basic syrup, which is added to the concentrate as the sweetener for most of Coca-Cola FEMSA’s beverages. Coca-Cola FEMSA’s bottler agreements provide that, with respect toCoca-Colatrademark beverages, these materials may be purchased only from suppliers approved by The Coca-Cola Company, including certain of our affiliates. Prices for packaging materials and HFCS historically have been determined with reference to the U.S. dollar, although the local currency equivalent in a particular country is subject to price volatility in accordance with changes in exchange rates. Coca-Cola FEMSA’s most significant packaging raw material costs arise from the purchase of resin, plastic preforms to make plastic bottles and finished plastic bottles, which Coca-Cola FEMSA obtains from international and local producers. The prices of these materials are related to crude oil prices and global resin supply. In recent years Coca-Cola FEMSA has experienced volatility in the prices we pay for these materials. Across its territories, Coca-Cola FEMSA’s average price for resin in U.S. dollars decreased 4.6% in 2014 as compared to 2013. Under Coca-Cola FEMSA’s agreements with The Coca-Cola Company, it may use raw or refined sugar or HFCS as sweeteners in its products. Sugar prices in all of the countries in which Coca-Cola FEMSA operates, other than Brazil, are subject to local regulations and other barriers to market entry that cause Coca-Cola FEMSA to pay in excess of international market prices for sugar in certain countries. In recent years, international sugar prices experienced significant volatility. Across Coca-Cola FEMSA’s territories, its average price for sugar in U.S. dollars decreased approximately 1.7% in 2014 as compared to 2013. Coca-Cola FEMSA categorizes water as a raw material in its business. Coca-Cola FEMSA obtains water for the production of some of its natural spring water products, such asManantialin Colombia andCrystal in Brazil, from spring water pursuant to concessions granted. None of the materials or supplies that Coca-Cola FEMSA uses is presently in short supply, although the supply of specific materials could be adversely affected by strikes, weather conditions, governmental controls, national emergency situations, water shortages or the failure to maintain its existing water concessions. Mexico and Central America. In Mexico, Coca-Cola FEMSA purchases its returnable plastic bottles from Graham Packaging México, S.A. de C.V., known as Graham, which is the exclusive supplier of returnable plastic bottles for The Coca-Cola Company and its bottlers in Mexico. Coca-Cola FEMSA mainly purchases resin from Indorama Ventures Polymers México, S. de R.L. de C.V. (formerly Arteva Specialties, S. de R.L. de C.V.), M. & G. Polímeros México, S.A. de C.V. and DAK Resinas Americas Mexico, S.A. de C.V., which Alpla México, S.A. de C.V., known as Alpla, and Envases Universales de México, S.A.P.I. de C.V. manufacture into non-returnable plastic bottles for Coca-Cola FEMSA. Coca-Cola FEMSA purchases all its cans from Fábricas de Monterrey, S.A. de C.V. and Envases Universales de México, S.A.P.I. de C.V., through Promotora Mexicana de Embotelladoras, S.A. de C.V., known as PROMESA, a cooperative ofCoca-Cola bottlers, in which, as of April 10, 2015, Coca-Cola FEMSA held a 35.0% equity interest. Coca-Cola FEMSA mainly purchases its glass bottles from EXCO Integral Services, S.A. de C.V. (formerly Compañía Vidriera, S.A. de C.V.), FEVISA Industrial, S.A. de C.V., and Glass & Silice, S.A. de C.V. Coca-Cola FEMSA purchases sugar from, among other suppliers, PIASA and Beta San Miguel, S.A. de C.V., both sugar cane producers in which, as of April 10, 2015, Coca-Cola FEMSA held a 36.3% and 2.7% equity interest, respectively. Coca-Cola FEMSA purchases HFCS from Ingredion México, S.A. de C.V., Almidones Mexicanos, S.A. de C.V. and Cargill de México, S.A. de C.V. Sugar prices in Mexico are subject to local regulations and other barriers to market entry that cause Coca-Cola FEMSA to pay higher prices than those paid in the international market. As a result, prices in Mexico have no correlation to international market prices. In 2014, sugar prices in Mexico decreased approximately 7.0% as compared to 2013. In Central America, the majority of Coca-Cola FEMSA’s raw materials such as glass and plastic bottles are purchased from several local suppliers. Coca-Cola FEMSA purchases all of its cans from PROMESA. Sugar is available from suppliers that represent several local producers. In Costa Rica, Coca-Cola FEMSA acquires plastic non-returnable bottles from Alpla C.R. S.A., and in Nicaragua Coca-Cola FEMSA acquires such plastic bottles from Alpla Nicaragua, S.A. South America (excluding Venezuela). In Colombia, Coca-Cola FEMSA uses sugar as a sweetener in most of its products, which it buys from several domestic sources. Coca-Cola FEMSA purchases plastic bottles from Amcor Rigid Plastics de Colombia, S.A. and Tapón Corona de Colombia S.A. Coca-Cola FEMSA has historically purchased all of its glass bottles from Peldar O-I; however, it has engaged new suppliers and has recently acquired glass bottles from Al Tajir and Frigoglass in both cases from the United Arab Emirates. Coca-Cola FEMSA purchases all of its cans from Crown Colombiana, S.A., which are only available through this local supplier. Grupo Ardila Lulle, owners of Coca-Cola FEMSA’s competitor Postobón, own a minority equity interest in Peldar O-I and Crown Colombiana, S.A. Sugar is available in Brazil at local market prices, which historically have been similar to international prices. Sugar prices in Brazil decreased approximately 4.1% as compared to 2013.See “Item 11. Quantitative and Qualitative Disclosures about Market Risk—Commodity Price Risk.” Coca-Cola FEMSA purchases glass bottles, plastic bottles and cans from several domestic and international suppliers. In Argentina, Coca-Cola FEMSA mainly uses HFCS that it purchases from several different local suppliers as a sweetener in its products. Coca-Cola FEMSA purchases glass bottles, plastic cases and other raw materials from several domestic sources. Coca-Cola FEMSA purchases plastic preforms, as well as returnable plastic bottles, at competitive prices from Andina Empaques S.A., a local subsidiary of Embotelladora Andina S.A., a Coca-Cola bottler with operations in Chile, Argentina, Brazil and Paraguay, and other local suppliers. Coca-Cola FEMSA also acquires plastic preforms from Alpla Avellaneda, S.A. and other suppliers. Venezuela. In Venezuela, Coca-Cola FEMSA uses sugar as a sweetener in most of its products, which it purchase mainly from the local market. Since 2003, from time to time, Coca-Cola FEMSA has experienced a sugar shortage due to lower domestic production and the inability of the predominant sugar importers to obtain permission to import in a timely manner. While sugar distribution to the food and beverages industry and to retailers is controlled by the government, Coca-Cola FEMSA did not experience any disruptions during 2014 with respect to access to sufficient sugar supply. However, we cannot assure you that Coca-Cola FEMSA will not experience disruptions in its ability to meet its sugar requirements in the future should the Venezuelan government impose restrictive measures. Coca-Cola FEMSA buys glass bottles from one local supplier, Productos de Vidrio, S.A., the only supplier authorized by The Coca-Cola Company. Coca-Cola FEMSA acquires most of its plastic non-returnable bottles from Alpla de Venezuela, S.A. and most of its aluminum cans from a local producer, Dominguez Continental, C.A. Under current regulations promulgated by the Venezuelan authorities, Coca-Cola FEMSA’s ability and that of its suppliers to import some of the raw materials and other supplies used in its production could be limited, and access to the official exchange rate for these items, including, among others, concentrate, resin, aluminum, plastic caps, distribution trucks and vehicles is only achieved by obtaining proper approvals from the relevant authorities. Overview and Background FEMSA Comercio FEMSA Comercio was established by FEMSA in 1978 when two OXXO stores were opened in Monterrey, one store in Mexico City and another store in Guadalajara. The motivating factor behind FEMSA’s entrance into the retail industry was to enhance beer sales through company-owned retail outlets as well as to gather information on customer preferences. In 2014, a In recent years, FEMSA Comercio has represented an effective distribution channel for our beverage products, as well as a rapidly growing point of Business Strategy A fundamental element of FEMSA Comercio’s business strategy is to utilize its position in the small-format store market to grow in a cost-effective and profitable manner. As a market leader in small-format store retailing, based on internal company surveys, management believes that FEMSA Comercio has an in-depth understanding of its markets and significant expertise in operating a national store chain. FEMSA Comercio intends to continue increasing its store base while capitalizing on the market knowledge gained at existing stores. FEMSA Comercio has developed proprietary models to assist in identifying appropriate store locations, store formats and product categories. Its model utilizes location-specific demographic data and FEMSA Comercio’s experience in similar locations to fine tune the store format and product offerings to the target market. Market segmentation is becoming an important strategic tool, and it should increasingly allow FEMSA Comercio to improve the operating efficiency of each location and the overall profitability of the chain. FEMSA Comercio has made and will continue to make significant investments in IT to improve its ability to capture customer information from its existing OXXO stores and to improve its overall operating performance. The majority of products carried through OXXO stores are bar-coded, and all OXXO stores are equipped with point-of-sale systems that are integrated into a company-wide computer network. To implement revenue management strategies, FEMSA Comercio created a division in charge of product category management for products, such as beverages, fast food and perishables, to enhance and better utilize its consumer information base and market intelligence capabilities. FEMSA Comercio utilizes a technology platform supported by FEMSA Comercio has adopted innovative promotional strategies in order to increase Store Locations With 12,812 OXXO stores in Mexico and 41 OXXO stores in Colombia as of December 31, 2014, FEMSA Comercio operates the largest small-format store chain in Latin America measured by number of stores. OXXO stores are concentrated in the northern part of Mexico, but also have a growing presence in the rest of the country. OXXO Stores Regional Allocation in Mexico and Latin America(*) as of December 31, 2014 FEMSA Comercio has aggressively expanded its number of OXXO stores over the past several years. The average OXXO Stores Total Growth
FEMSA Comercio currently expects to continue the OXXO stores growth trend established over the past several years by emphasizing growth in areas of high economic potential in existing markets and by expanding in underserved and unexploited markets. Management believes that the southeast part of Mexico is particularly underserved by the small-format store industry. The identification of locations and pre-opening planning in order to optimize the results of new OXXO stores are important elements in FEMSA Comercio’s growth plan. FEMSA Comercio continuously reviews store performance against certain operating and financial benchmarks to optimize the overall performance of the chain. OXXO stores unable to maintain benchmark standards are generally closed. Between December 31, 2010 and 2014, the total number of OXXO stores increased by 4,427, which resulted from the opening of 4,573 new stores and the closing of 146 existing stores. Competition FEMSA Comercio, mainly through OXXO stores, competes in the overall retail market, which we believe is highly competitive. OXXO stores face competition from small-format stores like 7-Eleven, Super Extra, Super City, Círculo K stores and other numerous chains of retailers across Mexico, from other regional small-format retailers to small informal neighborhood stores. OXXO competes both for consumers and for new locations for stores and the managers to operate those stores. FEMSA Comercio operates in the 32 Mexican states and has much broader geographical coverage than any of its competitors in Mexico. Market and Store Characteristics
Approximately 64.3% of OXXO stores’ customers are between the ages of 15 and 35. FEMSA Comercio also segments the market according to demographic criteria, including income level. OXXO Store Characteristics The average size of an OXXO store is approximately 104 square meters of selling space, excluding space dedicated to refrigeration, storage or parking. The average constructed area of a store is approximately 187 square meters and, when parking areas are included, the average store size is approximately 421 square meters. FEMSA Comercio—Operating Indicators
Beer, cigarettes, soft drinks and other beverages and snacks represent the main product categories for OXXO stores. FEMSA Comercio has a distribution agreement with Cuauhtémoc Moctezuma (which is now part of the Heineken Group). As a result Approximately 59% of OXXO stores are operated by independent managers responsible for all aspects of store operations. The managers are commission agents and are not employees of FEMSA Comercio. Each store manager is the legal employer of the store’s staff, which typically numbers six people per store. FEMSA Comercio continually invests in on-site operating personnel, with the objective of promoting loyalty, customer service and low personnel turnover in the stores. Advertising and Promotion FEMSA Comercio’s marketing efforts for OXXO stores include both specific product promotions and image advertising campaigns. These strategies seek to increase store traffic and sales, and to reinforce the OXXO name and market position. FEMSA Comercio manages its advertising for OXXO stores on three levels depending on the nature and scope of the specific campaign: local or store-specific, regional and national. Store-specific and regional campaigns are closely monitored to ensure consistency with the overall corporate image of OXXO stores and to avoid conflicts with national campaigns. FEMSA Comercio primarily uses point of purchase materials, flyers, handbills and print and radio media for promotional campaigns, although television is used occasionally for the introduction of new products and services. The OXXO store chain’s image and brand name are presented consistently across all stores, irrespective of location. Inventory and Purchasing FEMSA Comercio has placed considerable emphasis on improving operating performance. As part of these efforts, FEMSA Comercio continues to invest in extensive information management systems to improve inventory management. Electronic data collection has enabled FEMSA Comercio to reduce average inventory levels. Inventory replenishment decisions are carried out on a store-by-store basis. Management believes that the OXXO store chain’s scale of operations provides FEMSA Comercio with a competitive advantage in its ability to realize strategic alliances with suppliers. General category offerings are determined on a national level, although purchasing decisions are implemented on a local, regional or national level, depending on the nature of the product category. Given the fragmented nature of the retail industry in Mexico in general, Mexican producers of beer, soft drinks, bread, dairy products, snacks, cigarettes and other high-frequency products have established proprietary distribution systems with extensive direct distribution routes. As a result, approximately 53% of the OXXO store chain’s total sales consist of products that are delivered directly to the stores by suppliers. Other products with longer shelf lives are distributed to stores by FEMSA Comercio’s distribution system, which includes 16 regional warehouses located in Monterrey, Guadalajara, Mexicali, Mérida, León, Obregón, Puebla, Queretaro, Chihuahua, Reynosa, Saltillo, Tijuana, Toluca, Villahermosa and two in Mexico City. The distribution centers operate a fleet of approximately 792 trucks that make deliveries to each store approximately twice per week. Seasonality OXXO stores experience periods of high demand in December, as a result of the holidays, and in July and August, as a result of increased consumption of beer and soft drinks during the hot summer months. The months of November and February are generally the weakest sales months for OXXO stores. In general, colder weather during these months reduces store traffic and consumption of cold beverages. Entry into Drugstore Market During 2013, FEMSA Comercio entered the drugstore market in Mexico through two transactions. FEMSA Comercio through CCF, closed the acquisition of Farmacias YZA, a leading drugstore operator in Southeast Mexico, headquartered in Merida, Yucatan. The founding shareholders of Farmacias YZA hold a 25% stake in CCF. Following this transaction, on May 13, 2013, CCF acquired Farmacias Moderna, a leading drugstore operator in the western state of Sinaloa. In December 2014, FEMSA Comercio through CCF agreed to acquire 100% of Farmacias Farmacón, a a regional pharmacy chain consisting of 213 stores in the northwestern Mexican states of Sinaloa, Sonora, Baja California and Baja California Sur. With this transaction, FEMSA Comercio will reach a total of approximately 803 pharmacy stores. The transaction is pending customary regulatory approvals, and is expected to close during the second quarter of 2015. The rationale for entering this new market is anchored on our belief that FEMSA Comercio has developed certain capabilities and skills that should be applicable and useful in the operation of other small retail formats. These capabilities include site selection, logistics, business processes, human resources, inventory and supplier management. The drugstore market in Mexico is very fragmented and FEMSA Comercio believes it is well equipped to create value by entering this market and pursuing a growth strategy that maximizes the opportunity. Entry into Quick Service Restaurant Market Following the same rationale that its capabilities and skills are well suited to different types of small-format retail, during 2013 FEMSA Comercio also entered the quick service restaurant market in Mexico through the 80% acquisition of Doña Tota. This is a leading regional chain specializing in Mexican food with a particularly strong presence in the northeast of the country. This acquisition presented FEMSA Comercio with the opportunity to grow Doña Tota’s stand-alone store base across the country, while also offering the benefit of advancing FEMSA Comercio’s prepared food capabilities and expertise. Gas Station Market Since 1995, FEMSA Comercio has been providing services and assets for the operation of gasoline service stations through agreements with third parties that own Petroleos Mexicanos (PEMEX) franchises, using the commercial brand OXXO Gas. As of December 31, 2014 there were 227 OXXO Gas stations, most of them adjacent to OXXO stores. Mexican legislation has historically precluded FEMSA Comercio from participating in the retail sale of gasoline and therefore precluded ownership of PEMEX franchises, given our foreign institutional investor base. In response to recent changes in this legislation, FEMSA Comercio has agreed to acquire the related PEMEX franchises from the aforementioned third parties and plans to lease, acquire or open more gasoline service stations in the future. Other Stores FEMSA Comercio also operates other small-format stores, which include soft discount stores with a focus on perishables and liquor stores. Equity Investment in the Heineken Group As of December 31, 2014, FEMSA owned a non-controlling interest in the Heineken Group, one of the world’s leading brewers. As of December 31, 2014, our 20% economic interest in the Heineken Group was comprised of 43,018,320 shares of Heineken Holding N.V. and 72,182,203 shares of Heineken N.V. For 2014, FEMSA recognized equity income of Ps. 5,244 million regarding its 20% economic interest in the Heineken Group; see Note 10 to our audited consolidated financial statements. As described above, FEMSA Comercio has a distribution agreement with Cuauhtémoc Moctezuma (which is now a part of the Heineken Group) pursuant to which OXXO stores only carry beer brands produced and distributed by Cuauhtémoc Moctezuma. OXXO stores will continue to benefit from the existing relationship under which Cuauhtémoc Moctezuma will continue to be the exclusive supplier of beer to OXXO until June 2020. As of April 30, 2010, Coca-Cola FEMSA has agreed with Cervejarias Kaiser (also now part of the Heineken Group) to continue to distribute and sell the Kaiser beer portfolio in Coca-Cola FEMSA’s Brazilian territories for a 20-year term beginning in 2003, consistent with the arrangement already in place. In addition, our logistic services subsidiary provides certain services to Cuauhtémoc Moctezuma and its subsidiaries. Our other business consists of the following smaller operations that support our core operations: Our logistics services subsidiary provides a broad range of logistics and vehicle maintenance services to Coca-Cola FEMSA, FEMSA Comercio and third-party clients in the beverages, consumer products and retail industries. It has operations in Mexico, Brazil, Colombia, Panama, Costa Rica, Nicaragua and Perú. Our refrigeration business produces vertical and horizontal commercial refrigerators for the soft drink, beer and food industries, with an annual capacity of 535,800 units at December 31, 2014. In 2014, this business sold 418,064 refrigeration units, 30% of which were sold to Coca-Cola FEMSA, and the remainder of which were sold to third parties. Our corporate services subsidiary employs our corporate staff, including the personnel managing the areas of finance, corporate accounting, taxation, legal, financial and strategic planning, human resources, corporate affairs and internal audit. Through this subsidiary, we direct, control, supervise and review the operations of our sub-holding companies. As of December 31, 2014, FEMSA Comercio and our other business subsidiaries pay management fees for the services provided to them. In addition, Coca-Cola FEMSA has entered into a services agreement pursuant to which it pays for specific services. Description of Property, Plant and Equipment As of December 31, 2014, we owned all of our manufacturing facilities and substantially all of our warehouses and distribution centers. Our properties primarily consisted of production and distribution facilities for our soft drink operations and office space. In addition, FEMSA Comercio owns approximately 11.2% of the OXXO store locations, while the other stores are located in properties that are rented under long-term lease arrangements with third parties. The table below summarizes by country the installed capacity and percentage utilization of Coca-Cola FEMSA’s production facilities: Bottling Facility Summary As of December 31, 2014
The table below summarizes by country the location and facility area of each of Coca-Cola FEMSA’s production facilities. Bottling Facility by Location As of December 31, 2014
We maintain an “all risk” insurance policy covering our properties (owned and leased), machinery and equipment and inventories as well as losses due to business interruptions. The policy covers damages caused by natural disaster, including hurricane, hail, earthquake and damages caused by human acts, including explosion, fire, vandalism and riot. We also maintain a freight transport insurance policy that covers damages to goods in transit. In addition, we maintain a liability insurance policy that covers product liability. We purchase our insurance coverage through an insurance broker. In 2014, the policies for “all risk” property insurance, freight transport insurance and liability insurance were issued by ACE Seguros, S.A. Our “all risk” coverage was partially reinsured in the international reinsurance market. We believe that our coverage is consistent with the coverage maintained by similar companies. Capital Expenditures and Divestitures Our consolidated capital expenditures, net of disposals, for the years ended December 31, 2014, 2013 and 2012 were Ps. 18,163 million, Ps. 17,882 million and Ps. 15,560 million respectively, and were for the most part financed from cash from operations generated by our subsidiaries. These amounts were invested in the following manner:
Coca-Cola FEMSA In 2014, Coca-Cola FEMSA focused its capital expenditures on investments in (1) increasing production capacity, (2) placing coolers with retailers, (3) returnable bottles and cases, (4) improving the efficiency of its distribution infrastructure and (5) information technology. Through these measures, Coca-Cola FEMSA strives to improve its profit FEMSA Comercio FEMSA Comercio’s principal investment activity is the construction and opening of new stores. During 2014, FEMSA Comercio opened 1,132 net new OXXO stores. FEMSA Comercio invested Ps. Antitrust Legislation TheLey Federal de Competencia Económica (Federal Antitrust Law) became effective on June 22, 1993, regulating monopolistic practices and requiring Mexican government approval of certain mergers and acquisitions. The Federal Antitrust Law subjects the activities of certain Mexican companies, including us, to regulatory scrutiny. In June 2013, following a These amendments granted more power to the CFCE, including the ability to regulate essential facilities, order the divestment of assets and eliminate barriers to competition, set higher In Mexico and in some of the other countries in which we operate, we are involved in different ongoing competition related proceedings. We believe that the outcome of these proceedings will not have a material adverse effect on our financial position or results.See “Item 8. Financial Information—Legal Proceedings—Coca-Cola FEMSA.” Price Controls Voluntary price restraints or statutory price controls have been imposed historically in several of the countries in which Coca-Cola FEMSA operates. Currently, there are no price controls on Coca-Cola FEMSA’s products in any of the territories in which it has operations, except for those in Argentina, where authorities directly supervise five products sold through supermarkets as a measure to control inflation, and Venezuela, where the government has imposed price controls on certain products, including bottled water. In addition, in January 2014, the Venezuelan government passed the Fair Prices Law (Ley Orgánica de Precios Justos), which was amended in November 2014 mainly to increase applicable fines and penalties. This law substitutes both the Access to Goods and Services Defense Law (Ley para la Defensa y Acceso a las Personas a los Bienes y Servicios) and the Fair Costs and Prices Law (Ley de Costos y Precios Justos), which have both been repealed. The purpose of this law is to establish regulations and administrative processes to impose a limit on profits earned on the sale of goods, including our products, seeking to maintain price stability of, and equal access to, goods and services. This law imposes an obligation to manufacturing companies to label products with the fair or maximum sales’ price for each product. Coca-Cola FEMSA is currently in the process of implementing the necessary procedures and expects to be in compliance with this requirement by the imposed deadline. This law also creates the National Office of Costs and Prices which main role is to oversee price controls and set maximum retail prices on certain consumer goods and services. We cannot assure you that Coca-Cola FEMSA will be in compliance at all times with these laws based on changes, market dynamics in these two countries and the lack of clarity of certain basic aspects of the applicable law in Venezuela. Any such changes and potential violations may have an adverse impact on Coca-Cola FEMSA.See “Item 3. Key Information—Risk Factors—Regulatory developments may adversely affect Coca-Cola FEMSA’s business.” Mexican Tax Reform In December of 2013, the Mexican government enacted a package of tax reforms (the “2014 Tax Reform”) which includes several significant changes to tax laws, discussed in further detail below, that entered into effect on January 1, 2014. The most significant changes are as follows: The introduction of a new withholding tax at the rate of 10% for dividends and/or distributions of earnings generated in 2014 and beyond; The elimination of the exemption on gains from the sale of shares through a stock exchange recognized under applicable Mexican tax law. The gain will be taxable at the rate of 10% and will be paid by the shareholder based on the information provided by the financial intermediary. Transferors that are residents of a country with which Mexico has entered into a tax treaty for the avoidance of double taxation will be exempt.See “Item 10. Additional Information—Taxation—Mexican Taxation.” A fee of one Mexican peso per liter on the sale and import of flavored beverages with added sugar, and an excise tax of 8% on food with caloric content equal to, or greater than 275 kilocalories per 100 grams of product; The prior 11% value added tax (VAT) rate that applied to transaction in the border region was raised to 16%, matching the general VAT rate applicable in the rest of Mexico; The elimination of the tax on cash deposits (IDE) and the business flat tax (IETU); Deductions on exempt payroll items for workers are limited to 53%; The income tax rate in 2013 and 2012 was 30%. Scheduled decreases to the income tax rate that would have reduced the rate to 29% in 2014 and 28% in 2015 and thereafter, were canceled in connection with the 2014 Tax Reform; The repeal of the existing tax consolidation regime, which is effective as of January 1, 2014, modified the payment term of a tax on assets payable of Ps. 180, which will be paid over the following 5 years instead of an indefinite term; and The introduction of a new optional tax integration regime (a modified form of tax consolidation), which replaces the previous tax consolidation regime. The new optional tax integration regime requires an equity ownership of at least 80% for qualifying subsidiaries and would allow us to defer the annual tax payment of our profitable participating subsidiaries for a period equivalent to 3 years to the extent their individual tax expense exceeds the integrated tax expense of the Company. Similar to other affected entities in the industry, Coca-Cola FEMSA has filed constitutional challenges (amparo) against the new special tax referred to above on the production, sale and importation of beverages with added sugar and HFCS. Coca-Cola FEMSA cannot ensure that these measures will have the desired effect or that Coca-Cola FEMSA will prevail in its constitutional challenge. Other Recent Tax Reforms On January 1, 2015, a general tax reform became effective in Colombia. This reform included the imposition of a new temporary tax on net equity through 2017 to Colombian residents and non-residents who own property in Colombia directly or indirectly through branches or permanent establishments. The relevant taxable base will be determined annually based on a formula. For net equity that exceeds 5.0 billion Colombian pesos (approximately US$ 2.1 million) the rate will be 1.15% in 2015, 1.00% in 2016 and 0.40% in 2017. In addition, the tax reform in Colombia imposed that the supplementary income tax at a rate of 9% as contributions to social programs, which was previously scheduled to decrease to 8% by 2015, will remain indefinitely. Additionally, this tax reform included the imposition of a temporary contribution to social programs at a rate of 5%, 6%, 8% and 9% for the years 2015, 2016, 2017 and 2018, respectively. Finally, this reform establishes an income tax deduction of 2% of value-added tax paid in the acquisition or import of hard assets, such as tangible and amortizable assets that are not sold or transferred in the ordinary course of business and that are used for the production of goods or services. In Guatemala, the income tax rate for 2014 was 28% and it decreased for 2015 to 25%, as scheduled. On November 18, 2014, a tax reform became effective in Venezuela. This reform included changes on how the carrying value of operating losses is reported. The reform established that operating losses carried forward year over year (but limited to three fiscal years) may not exceed 25% of the taxable income in the relevant period. The reform also eliminated the possibility to carry over losses relating to inflationary adjustments and included changes that grant Venezuelan tax authorities broader powers and authority in connection with their ability to enact administrative rulings related to income tax withholding and to collect taxes and increase fines and penalties for tax-related violations, including the ability to confiscate assets without a court order. Taxation of Beverages All the countries in which Coca-Cola FEMSA operates, except for Panama, impose a value-added tax on the sale of sparkling beverages, with a rate of 16% in Mexico, 12% in Guatemala, 15% in Nicaragua, 16.2% in Costa Rica, 16% in Colombia (applied only to the first sale in the supply chain), 12% in Venezuela, 21% in Argentina, and in Brazil 17% in the states of Mato Grosso do Sul and Goiás and 18% in the states of São Paulo, Minas Gerais, Paraná and Rio de Janeiro. The state of Rio de Janeiro also charges an additional 1% as a contribution to a poverty eradication fund. In Brazil the value-added tax is grossed-up and added, along with federal sales tax, at the taxable basis. In addition, Coca-Cola FEMSA is responsible for charging and collecting the value-added tax from each of its retailers in Brazil, based on average retail prices for each state where it operates, defined primarily through a survey conducted by the government of each state, which in 2014 represented an average taxation of approximately 9.4% over net sales. In addition, several of the countries in which Coca-Cola FEMSA operates impose the following excise or other taxes: Mexico imposes an excise tax of Ps. 1.00 per liter on the production, sale and importation of beverages with added sugar and HFCS as of January 1, 2014. This tax is applied only to the first sale and Coca-Cola FEMSA is responsible for charging and collecting this excise tax. Guatemala imposes an excise tax of 0.18 cents in local currency (Ps. 0.3489 as of December 31, 2014) per liter of sparkling beverage. Costa Rica imposes a specific tax on non-alcoholic bottled beverages based on the combination of packaging and flavor, currently assessed at 18.35 colones (Ps. 0.4955 as of December 31, 2014) per 250 ml, and an excise tax currently assessed at 6.373 colones (approximately Ps. 0.174 as of December 31, 2014) per 250 ml. Nicaragua imposes a 9.0% tax on consumption, and municipalities impose a 1.0% tax on our Nicaraguan gross income. Panama imposes a 5.0% tax based on the cost of goods produced and a 10.0% selective consumption tax on syrups, powders and concentrate. Argentina imposes an excise tax of 8.7% on sparkling beverages containing less than 5.0% lemon juice or less than 10.0% fruit juice, and an excise tax of 4.2% on sparkling water and flavored sparkling beverages with 10.0% or more Brazil assesses an average production tax of approximately 4.8% and Colombia’s municipalities impose a sales tax that varies between 0.35% and 1.2% of Venezuela’s municipalities impose a variable excise tax applied only to the first sale that varies between 0.6% and 2.5% of net sales. Environmental Matters In all of our territories, our operations are subject to federal and state laws and regulations relating to the protection of the environment.
In Mexico, the principal legislation relating to environmental matters is theLey General de Equilibrio Ecológico y Protección al Ambiente (Federal General Law for Ecological Equilibrium and Environmental Protection, or the Mexican Environmental Law) and theLey General para la Prevención y Gestión Integral de los Residuos (General Law for the Prevention and Integral Management of Waste). Under the Mexican Environmental Law, rules have been promulgated concerning water, air and noise pollution and hazardous substances. In particular, Mexican environmental laws and regulations require that we file periodic reports with respect to air and water emissions and hazardous wastes and set forth standards for waste water discharge that apply to our operations. We are also subject to certain minimal restrictions on the operation of delivery trucks in Mexico City. We have implemented several programs designed to facilitate compliance with air, waste, noise and energy standards established by current Mexican federal and state environmental laws, including a program that installs catalytic converters and liquid petroleum gas in delivery trucks for our operations in Mexico City. In addition, we are subject to theLey de Aguas Nacionales de 1992(as amended, the 1992 Water Law), enforced by theComisión Nacional del Agua(National Water Commission). Adopted in December 1992, and amended in 2004, the 1992 Water Law provides that plants located in Mexico that use deep water wells to supply their water requirements must pay a fee to the local governments for the discharge of residual waste water to drainage. Pursuant to this law, certain local authorities test the quality of the waste water discharge and charge plants an additional fee for measurements that exceed certain standards published by the National Water Commission. In the case of non-compliance with the law, penalties, including closures, may be imposed. All of Coca-Cola FEMSA’s bottling plants located in Mexico have met these standards. In addition, Coca-Cola FEMSA’s plants in Apizaco and San Cristóbal are certified with ISO 14001. In Coca-Cola FEMSA’s Mexican operations, it established a partnership with The Coca-Cola Company and ALPLA, a supplier of plastic bottles to Coca-Cola FEMSA in Mexico, to createIndustria Mexicana de Reciclaje (IMER), a PET recycling facility located in Toluca, Mexico. This facility started operations in 2005 and has a recycling capacity of approximately 25,000 metric tons per year from which 15,000 metric tons can be re-used in PET bottles for food packaging purposes. Coca-Cola FEMSA has also continued contributing funds to a nationwide recycling company,Ecología y Compromiso Empresarial (Environmentally Committed Companies). In addition, Coca-Cola FEMSA’s plants located in Toluca, Reyes, Cuautitlán, Apizaco, San Cristóbal, Morelia, Ixtacomitan, Coatepec, Poza Rica, Ojuelos, Pacífico and Cuernavaca have received or are in the process of receiving a Certificado de Industria Limpia (Certificate of Clean Industry). Additionally, several of our subsidiaries have entered into long-term wind power purchase agreements with wind park developers in Mexico to receive electrical energy for use at production and distribution facilities of FEMSA and Coca-Cola FEMSA throughout Mexico, as well as Central America Coca-Cola FEMSA’s Central American operations are subject to several federal and Colombia Coca-Cola FEMSA’s Colombian operations are subject to several Colombian federal and state laws and regulations related to the protection of the environment and the disposal of treated water and toxic and hazardous materials. These laws include the control of atmospheric emissions, noise emissions, disposal of treated water and strict limitations on the use of chlorofluorocarbons. In addition, on February 6, 2012, Colombia promulgated Decree No. 303, which requires Coca-Cola FEMSA to apply for an authorization to discharge its water into public waterways. Coca-Cola FEMSA is engaged in nationwide reforestation programs, and Venezuela Coca-Cola FEMSA’s Venezuelan operations are subject to several Venezuelan federal, state and municipal laws and regulations related to In addition, in December 2010, the Venezuelan government approved theLey Integral de Gestión de la Basura (Comprehensive Waste Management Law), which regulates solid waste management and which may be applicable to manufacturers of products for mass consumption. The full scope of this law has not yet been established. Brazil Coca-Cola FEMSA’s Brazilian operations are subject to several federal, state and municipal laws and regulations related to the protection of the environment. Among the most relevant laws and regulations are those dealing with the emission of toxic and hazardous gases, disposal of wastewater and solid waste, and soil contamination by hazardous chemicals, which impose penalties, such as fines, facility closures or criminal charges depending upon the level of non-compliance. Coca-Cola FEMSA’s production plant located in Jundiaí has been recognized by the Brazilian authorities for its compliance with environmental regulations and for having standards well above those imposed by the law. The plant of Jundiaí has been certified for GAO-Q and GAO-E. In addition, the plants of Jundiaí, Mogi das Cruzes, Campo Grande, Marília, Maringá, Curitiba and Bauru have been certified for (i) ISO 9001: 2008; (ii) ISO 14001: 2004 and; (iii) norm OHSAS 18001: 2007. In 2012, the Jundiaí, Campo Grande, Bauru, Marília, Curitiba, Maringá, Porto Real and Mogi das Cruzes plants were certified in standard FSSC22000. In Brazil, a municipal regulation of the City of São Paulo, implemented pursuant to Law 13.316/2002, came into effect in May 2008. This regulation requires Coca-Cola FEMSA to collect for recycling a specified annual percentage of plastic bottles made from PET sold in the City of São Paulo; such percentage increases each year. Beginning in May 2011, Coca-Cola FEMSA was required to collect 90% of the PET bottles sold in the city of São Paulo for recycling. Currently, Coca-Cola FEMSA is not able to collect the entire required volume of PET bottles it has sold in the City of São Paulo for recycling. Since Coca-Cola FEMSA does not meet the requirements of this regulation, which we believe to be more onerous than those imposed by the countries with the highest recycling standards, it could be fined and be subject to other sanctions, such as the suspension of operations in any of its plants and/or distribution centers located in the City of São Paulo. In May 2008, Coca-Cola FEMSA, together with other bottlers in the city of São Paulo, through theAssociação Brasileira das Indústrias de Refrigerantes e de Bebidas Não-alcoólicas (Brazilian Soft Drink and Non-Alcoholic Beverage Association, or ABIR), filed a motion requesting a court to overturn this regulation due to the impossibility of compliance. In addition, in November 2009, in response to a municipal authority request for Coca-Cola FEMSA to demonstrate the destination of the PET bottles sold by it in the City of São Paulo, Coca-Cola FEMSA filed a motion showing all of its recycling programs and requesting a more practical timeline to comply with the requirements of the law. In October 2010, the municipal authority of the City of São Paulo levied a fine on Coca-Cola FEMSA’s Brazilian operating subsidiary of 250,000 Brazilian reais (approximately Ps. 1.4 million as of December 31, 2014) on the grounds that the report submitted by Coca-Cola FEMSA’s Brazilian operating subsidiary did not comply with the 75% proper disposal requirement for the period from May 2008 to May 2010. Coca-Cola FEMSA filed an appeal against this fine, which was denied by the municipal authority in May 2013, and the administrative stage is therefore closed. Coca-Cola FEMSA is currently evaluating next steps. In July 2012, the State Appellate Court of São Paulo rendered a decision admitting an interlocutory appeal filed on behalf of ABIR suspending the fines and other sanctions to ABIR’s associated companies, including Coca-Cola FEMSA’s Brazilian subsidiary, for alleged noncompliance with the recycling municipal regulation up to the final resolution of the lawsuit. Coca-Cola FEMSA is currently awaiting final resolution of the lawsuit filed on behalf of ABIR. We cannot assure you that these measures will have the desired effect or that Coca-Cola FEMSA will prevail in its judicial challenge. In August 2010, Law No. 12.305/2010 established the Brazilian National Solid Waste Policy. This policy is based on the principle of shared responsibility between the government, companies and the public, and provides for the post-consumption return of products to companies and requires public authorities to implement waste management programs. This law is regulated by Federal Decree No. 7.404/2010, and was published in December 2010. In response to the Brazilian National Solid Waste Policy, in December 2012, a proposal was provided to the Ministry of the Environment by almost 30 associations involved in the packaging sector, including ABIR in its capacity as representative for The Coca-Cola Company, Coca-Cola FEMSA’s Brazilian subsidiary, and other bottlers. The proposal involved creating a “coalition” to implement systems for reverse logistics packaging non-dangerous waste that makes up the dry portion of municipal solid waste or its equivalent. The goal of the proposal is to create methodologies for sustainable development, and protect the environment, society, and the economy. Coca-Cola FEMSA is currently awaiting a final resolution from the Argentina Coca-Cola FEMSA’s Argentine operations are subject to federal and municipal laws and regulations relating to the protection of the For all of Coca-Cola FEMSA’s plant operations, it employs an environmental management system:Sistema de Administración Ambiental (Environmental Administration System, or EKOSYSTEM) that is contained withinSistema Integral de Calidad (Integral Quality System, or SICKOF). Coca-Cola FEMSA has expended, and may be required to expend in the future, funds for compliance with and remediation under local environmental laws and regulations. Currently, we do not believe that such costs will have a material adverse effect on Coca-Cola FEMSA’s results or financial condition. However, since environmental laws and regulations and their enforcement are becoming increasingly more stringent in Coca-Cola FEMSA’s territories, and there is increased recognition by local authorities of the need for higher environmental standards in the countries where it operates, changes in current regulations may result in an increase in costs, which may have an adverse effect on Coca-Cola FEMSA’s future results or financial condition. Coca-Cola FEMSA is not We do not believe that Coca-Cola FEMSA’s business activities pose a material risk to the environment, and we believe that Coca-Cola FEMSA is in material compliance with all applicable environmental laws and regulations. Other Regulations In December 2009, the Venezuelan government issued a decree requiring a reduction in energy consumption by at least 20% for industrial companies whose consumption is greater than two megawatts per hour and to submit an energy-usage reduction plan. Some of Coca-Cola FEMSA’s bottling operations in Venezuela outside of Caracas met this threshold and it submitted a plan, which included the purchase of generators for its plants. In January 2010, the Venezuelan government subsequently implemented power cuts and other measures for all industries in Caracas whose consumption was above 35 kilowatts per hour. In 2011, Coca-Cola FEMSA installed electrical generators in its Antimano, Barcelona, Maracaibo and Valencia bottling facilities to mitigate any such risks and filed the respective energy usage reduction plans with the authorities. In addition, since January 2010, the Venezuelan government has implemented power cuts and other measures for all industries in Caracas whose consumption is above 35 kilowatts per hour and continues to do so. In August 2010, the Mexican government approved a decree which regulated the sale of food and beverages by elementary and middle schools. In May 2014, the decree was replaced by a new decree that establishes mandatory guidelines applicable to the entire national education system (from elementary school through college). According to the decree, the sale of specific sparkling beverages and still beverages that contain sugar or HFCS by schools is prohibited. Schools are still allowed to sell water and certain still beverages, such as juices and juice-based beverages, that comply with the guidelines established in such decree. We cannot assure you that the Mexican government will not further restrict sales of other of Coca-Cola FEMSA’s products by such schools. These restrictions and any further restrictions could have an adverse impact on Coca-Cola FEMSA’s results of operations. In January 2012, the Costa Rican government approved a decree which regulates the sale of food and beverages in public schools. The decree came into effect in 2012. According to the decree, the sale of specific sparkling beverages and still beverages that contain sugar, syrup or HFCS in any type of presentation in schools is prohibited. Coca-Cola FEMSA is still allowed to sell water and certain still beverages in schools. In December 2014, the Costa Rican government announced that it will be stricter in the enforcement of this decree. Although Coca-Cola FEMSA is in compliance with this law, we cannot assure you that the Costa Rican government will not further restrict sales of other of Coca-Cola FEMSA’s products in schools in the future; these restrictions and any further restrictions could have an adverse impact on Coca-Cola FEMSA’s results of operations. In May 2012, the Venezuelan government adopted significant changes to labor regulations. This amendment to Venezuela’s labor regulations had a negative impact on Coca-Cola FEMSA’s business and operations. The principal changes that impacted Coca-Cola FEMSA’s operations are: (i) the requirement that employee terminations are now subject to governmental authorization; (ii) retroactive assessments for any modifications to Coca-Cola FEMSA’s severance payment system; (iii) a reduction in the maximum daily and weekly working hours (from 44 to 40 weekly); (iv) an increase in mandatory weekly breaks, prohibiting a reduction in salaries as a result of such increase; and (v) the requirement that all third party contractors participating in the manufacturing and sales processes of Coca-Cola FEMSA’s products be included in its payroll by no later than May 2015. Coca-Cola FEMSA is currently in compliance with these labor regulations and expects to include all third party contractors to its payroll by the imposed deadline. In November 2014, the Venezuelan government amended the Foreign Investment Law. As part of the amendments made, the law now provides that at least 75% of the value of foreign investment must be comprised of assets located in Venezuela, which may include equipment, supplies or other goods or tangible assets required at the early stages of operations. By the end of the first fiscal year after commencement of operations in Venezuela, investors will be authorized to repatriate up to 80% of the profits derived from their investment. Any profits not otherwise repatriated in a fiscal year, may be accumulated and be repatriated the following fiscal year, together with profits generated during such year. In the event of liquidation, a company may repatriate up to 85% of the value of the foreign investment. Currently, the scope of this law is not entirely clear with respect to the liquidation process. In September 2012, the Brazilian government issued Law No. 12,619 (Law of Professional Drivers), which regulates the working hours of professional drivers who distribute Coca-Cola FEMSA’s products from its plants to the distribution centers and to retailers and points of sale. Pursuant to this law, employers must keep a record of working hours, including overtime hours, of professional drivers in a reliable manner, such as electronic logbooks or worksheets. Coca-Cola FEMSA is currently in compliance with this law as we follow all these requirements. In June 2014, the Brazilian government issued Law No. 12,997 (Law of Motorcycle Drivers) which imposes a risk premium of 30% of the base salary payable to all employees who drive motorcycles in their job. This risk premium became enforceable in October 2014, when the related rules and regulations were issued by the Ministry of Labor and Employment. Coca-Cola FEMSA believes that these rules and regulations were unduly issued by such Ministry since it did not comply with all the essential requirements established in Law No. 12,997. In November 2014, Coca-Cola FEMSA, in conjunction with other bottlers of the Coca-Cola system in Brazil and through the ABIR, filed an action against the Ministry of Labor and Employment to suspend the effects of such law. ABIR’s associated companies, including Coca-Cola FEMSA’s Brazilian subsidiary, were issued a preliminary injunction suspending the effects of the law and exempting us from paying the risk premium. We cannot assure you that the Brazilian government will not appeal the injunction with the competent courts in Brazil in order to restore the effects of Law No. 12,997. In June 2013, following a comprehensive In 2013, the government of Argentina imposed a withholding tax at a rate of 10% on dividends paid by Argentine companies to non-Argentine holders. Similarly, in 2013, the government of Costa Rica repealed a tax exemption on dividends paid to Mexican residents. Future dividends will be subject to withholding tax at a rate of 15%. In January 2014, a new Anti-Corruption Law in Brazil came into effect, which regulates bribery, corruption practices and fraud in connection with agreements entered into with governmental agencies. The main purpose of this law is to impose liability on companies carrying out such practices, establishing fines that can reach up to 20% of a company’s gross revenues in the previous fiscal year. Although Coca-Cola FEMSA believes it is in compliance with this law, if it was found liable for any of these practices, this law would have an adverse effect on its business. Water Supply In Mexico, Coca-Cola FEMSA obtains water directly from municipal utility companies and pumps water from its own wells pursuant to concessions obtained from the Mexican government on a plant-by-plant basis. Water use in Mexico is regulated primarily by the 1992 Water Law, and regulations issued thereunder, which created the National Water Commission. The National Water Commission is in charge of overseeing the national system of water use. Under the 1992 Water Law, concessions for the use of a specific volume of ground or surface water generally run from five- to fifty-year terms, depending on the supply of groundwater in each region as projected by the National Water Commission. Concessionaires may request that concession terms be extended before they expire. The Mexican government is authorized to reduce the volume of ground or surface water granted for use by a concession by whatever volume of water that is not used by the concessionaire for two consecutive years. However, because the current concessions for each of Coca-Cola FEMSA’s plants in Mexico do not match each plant’s projected needs for water in future years, we successfully negotiated with the Mexican government the right to transfer the unused volume under concessions from certain plants to other Although we have not undertaken independent studies to confirm the sufficiency of the existing groundwater supply, we believe that our existing concessions satisfy our current water requirements in Mexico. In Brazil, Coca-Cola FEMSA buys water directly from municipal utility companies and we also capture water from underground sources, wells or surface sources (i.e., rivers), pursuant to concessions granted by the Brazilian government for each plant. According to the Brazilian Constitution, water is considered an asset of common use and can only be exploited for the national interest by Brazilians or companies formed under Brazilian law. Concessionaires and users have the responsibility for any damage to the environment. The exploitation and use of water is regulated by theCódigo de Mineração (Code of Mining, Decree Law No. 227/67), theCódigo de Águas Minerais (Mineral Water Code, Decree Law No. 7841/45), the National Water Resources Policy (Law No. 9433/97) and by regulations issued thereunder. The companies that exploit water are supervised by theDepartamento Nacional de Produção Mineiral—DNPM (National Department of Mineral Production) and the National Water Agency in connection with federal health agencies, as well as state and municipal authorities. In Coca-Cola FEMSA’s Jundiaí, Marília, Curitiba, Maringá, Porto Real and Belo Horizonte plants, it does not exploit spring water. In its Mogi das Cruzes, Bauru and Campo Grande plants, it has all the necessary permits for the exploitation of spring water. In Argentina, a state water company provides water to Coca-Cola FEMSA’s Alcorta plant on a limited basis; however, we believe the authorized amount meets Coca-Cola FEMSA’s requirements for this plant. In Coca-Cola FEMSA’s Monte Grande plant in Argentina, it pumps water from its own wells, in accordance with Law 25.688. In Colombia, in addition to natural spring water, Coca-Cola FEMSA obtains water directly from its own wells and from utility companies. Coca-Cola FEMSA is required to have a specific concession to exploit water from natural sources. Water use in Colombia is regulated by Law No. 9 of 1979 and Decrees No. 1594 of 1984 and No. 2811 of 1974. In addition, on February 6, 2012, Colombia promulgated Decree No. 303, which requires Coca-Cola FEMSA to apply for water concessions and for authorization to discharge its water into public waterways. The National Institute of National Resources supervises companies that use water as a raw material for their business. In Nicaragua, the use of water is regulated by theLey General de Aguas Nacionales (National Water Law), and Coca-Cola FEMSA obtains water directly from its own wells. In Costa Rica, the use of water is regulated by the Ley de Aguas (Water Law). In both of these countries, Coca-Cola FEMSA owns and exploits its own water wells granted to it through governmental concessions. In Guatemala, no license or permits are required to exploit water from the private wells in Coca-Cola FEMSA’s own plants. In Panama, Coca-Cola FEMSA acquires water from a state water company, and the use of water is regulated by theReglamento de Uso de Aguas de Panamá (Panama Use of Water Regulation). In Venezuela, Coca-Cola FEMSA uses private wells in addition to water provided by the municipalities, and it has taken the appropriate actions, including actions to comply with water regulations, to have water supply available from these sources, regulated by theLey de Aguas (Water Law). In addition, Coca-Cola FEMSA obtains water for the production of some of its natural spring water products, such asManantialin Colombia and Crystal in Brazil, from spring water pursuant to concessions granted. We cannot assure you that water will be available in sufficient quantities to meet Coca-Cola FEMSA’s future production needs, that it will be able to maintain its current concessions or that additional regulations relating to water use will not be adopted in the future in its territories. We believe that we are in material compliance with the terms of our existing water concessions and that we are in compliance with all relevant water regulations.
None.
The following discussion should be read in conjunction with, and is entirely qualified by reference to, our audited consolidated financial statements and the notes to those financial statements. Our consolidated financial statements were prepared in accordance with IFRS as issued by the IASB. Overview of Events, Trends and Uncertainties Management currently considers the following events, trends and uncertainties to be important to understanding its results and financial position during the periods discussed in this section:
FEMSA Comercio has maintained high rates of OXXO store openings and continues to grow in terms of total revenues. FEMSA Comercio has lower operating margins than our beverage business. Given that FEMSA Comercio has lower operating margins and given its fixed cost structure, it is more sensitive to changes in sales which could negatively affect operating margins. In addition, the integration of the new small-format retail businesses could also affect margins at the FEMSA Comercio level, given that these businesses have lower margins than the OXXO business. Our consolidated results of operations are also significantly affected by the performance of the Heineken Group, as a result of our 20% economic interest. Our consolidated net income for 2014 included Ps. 5,244 million related to our non-controlling interest in the Heineken Group, as compared to Ps. Our results and financial position are affected by the In February 2015, the As of February 2015, there are three exchange rates in Venezuela. The official rate of 6.30 bolivars per U.S. dollar rate, the exchange rate determined by the state-run system known as SICAD, and a new exchange rate determined by the state-run system known as SIMADI. The SICAD determines the exchange rates based on limited periodic sales of U.S. dollars through auctions. The SIMADI determines the exchange rates based on supply and demand of U.S. dollars. The SICAD and SIMADI exchange rates in effect as of April 17, 2015, were 12.00 and 196.66 bolivars per US$ 1.00, respectively. The Venezuelan government has established that imports of certain of our raw materials into Venezuela qualify as transactions that may be settled using the official exchange rate of 6.30 bolivars per US$ 1.00. To the extent that imports of these raw materials continue to be so qualified, we will continue to account for these transactions using the official exchange rate. However, we will continue to monitor any changes that may effect the applicable exchange rate that we use to settle imports of our raw materials into Venezuela. In November 2014, we announced that Federico Reyes Garcia, FEMSA’s Vice President of Corporate Development, would retire on April 1, 2015. Mr. Reyes Garcia will remain on the boards of directors and Finance Committees of FEMSA and Coca-Cola FEMSA. Javier Astaburuaga Sanjines, FEMSA’s Chief Financial and Corporate Officer, replaced Mr. Reyes Garcia as Vice President of Corporate Development. From his new position, Mr. Astaburuaga Sanjines will be closely involved in FEMSA’s strategic and M&A-related processes, and he will also continue to serve on the boards of directors of FEMSA and Coca-Cola FEMSA, as well as on the Heineken Supervisory Board. Effective January 1, 2015, Daniel Alberto Rodríguez Cofré joined FEMSA and on April 1, 2015 he replaced Mr. Astaburuaga Sanjines as Chief Financial and Corporate Officer, and he also serves on the boards of directors of FEMSA and Coca-Cola FEMSA. Effects of Changes in Economic Conditions Our results are affected by changes in economic conditions in Mexico, Brazil and in the other countries in which we operate. For the years ended December 31, 2014, 2013, and 2012, 68%, 63% and 62%, respectively, of our total sales were attributable to Mexico. As a result, we have significant exposure to the economic conditions of certain countries, particularly those in Central America, Colombia, Venezuela, Brazil and Argentina, although we continue to generate a substantial portion of our total sales from Mexico. Other than Venezuela, the participation of these other countries as a percentage of our total sales has not changed significantly during the last five years. The Mexican economy is gradually recovering from a downturn as a result of the impact of the global financial crisis on many emerging economies in 2009. According to INEGI, Mexican GDP expanded by 2.1% in 2014 and by approximately 1.4% and 4.0% in 2013 and 2012, respectively. According to the Banco Nacional de México survey regarding the economic expectations of specialists, Mexican GDP is expected to increase by 3.08% in 2015, as of the latest estimate, published on March 5, 2015. The Mexican economy continues to be heavily influenced by the U.S. economy, and therefore, deterioration in economic conditions in, or delays in the recovery of, the U.S. economy may hinder any recovery in Mexico. Our results are affected by the economic conditions in the countries where we conduct operations. Most of these economies continue to be heavily influenced by the U.S. economy, and therefore, deterioration in economic conditions in the U.S. economy may affect these economies. Deterioration or prolonged periods of weak economic conditions in the countries where we conduct operations may have, and in the past have had, a negative effect on our company and a material adverse effect on our results and financial condition. Our business may also be significantly affected by the interest rates, inflation rates and exchange rates of the currencies of the countries in which we operate. Decreases in growth rates, periods of negative growth and/or increases in inflation or interest rates may result in lower demand for our products, lower real pricing of our products or a shift to lower margin products. In addition, an increase in interest rates would increase the cost to us of variable rate funding, which would have an adverse effect on our financial position. Beginning in the fourth quarter of 2012 and through 2014, the exchange rate between the Mexican peso and the
Companies with structural characteristics that result in
In addition, the commercial operations of Coca-Cola FEMSA are carried out through extensive distribution networks, the principal fixed assets of which are warehouses and
Critical Accounting Judgments and Estimates In the application of our accounting policies, which are described in Note 2.3 to our audited consolidated financial statements, management is required to make judgments, estimates and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimate is revised if the revision affects only that period or in the period of the revision and future periods if the revision affects both current and future periods. The following are the key assumptions concerning the future and other key sources of estimation uncertainty at the end of the reporting period that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year. Existing circumstances and assumptions about future developments, however, may change due to market changes or circumstances arising beyond our control. Such changes are reflected in the assumptions when they occur. Impairment of indefinite lived intangible assets, goodwill and depreciable long-lived assets Intangible assets with indefinite lives including goodwill are subject to annual impairment tests. Impairment exists when the carrying value of an asset or cash generating unit (CGU) exceeds its recoverable amount, which is the higher of its fair value less costs to sell and its value in use. The fair value less costs to sell calculation is based on available data from binding sales transactions in arm’s length transactions of similar assets or observable market prices less incremental costs for disposing of the asset. In order to determine whether such assets are impaired, we initially calculate an estimation of the value in use of the cash-generating units to which such assets have been allocated. The value in use calculation requires management to estimate the future cash flows expected to arise from the cash-generating unit and a suitable discount rate in order to calculate present value. We review annually the carrying value of our intangible assets with indefinite lives and goodwill for impairment based on recognized valuation techniques. While we believe that our estimates are reasonable, different assumptions regarding such estimates could materially affect our evaluations. Impairment losses are recognized in current earnings in the period the related impairment is determined. The key assumptions used to determine the recoverable amount for our CGUs, including a sensitivity analysis, are further explained in Notes 3.16 and 12 to our audited consolidated financial statements. We assess at each reporting date whether there is an indication that an asset may be impaired. If any indication exists, or when annual impairment testing for an asset is required, we estimate the asset’s recoverable amount. When the carrying amount of an asset or CGU exceeds its recoverable amount, the asset is considered impaired and is written down to its recoverable amount. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. In determining fair value less costs to sell, recent market transactions are taken into account, if available. If no such transactions can be identified, an appropriate valuation model is used. These calculations are corroborated by valuation multiples, quoted share prices for publicly traded subsidiaries Useful lives of property, plant and equipment and intangible assets with defined useful lives Property, plant and equipment, including returnable bottles as they are expected to provide benefits over a period of more than one year, as well as intangible assets with defined useful lives, are depreciated/amortized over their estimated useful lives. We base our estimates on the experience of our technical personnel as well as on our experience in the industry for similar assets; see Notes 3.12, 3.14, 11 and 12 to our audited consolidated financial statements. Post-employment and other long-term employee benefits We regularly evaluate the reasonableness of the assumptions used in our post-employment and other long-term employee benefit computations. Information about such assumptions is described in Note 16 to our audited consolidated financial statements. Income taxes Deferred income tax assets and liabilities are determined based on the differences between the financial statement carrying amounts and the tax basis of assets and liabilities. We regularly review our deferred tax assets for recoverability, and record a deferred tax asset based on our judgment regarding the probability of historical taxable income continuing in the future, projected future taxable income and the expected timing of the reversals of existing temporary differences; see Note 24 to our audited consolidated financial statements. Tax, labor and legal contingencies and provisions We are subject to various claims and contingencies, related to tax, labor and legal proceedings as described in Note 25 to our audited consolidated financial statements. Due to their nature, such legal proceedings involve inherent uncertainties including, but not limited to, court rulings, negotiations between affected parties and governmental actions. Management periodically assesses the probability of loss for such contingencies and accrues a provision and/or discloses the relevant circumstances, as appropriate. If the potential loss of any claim or legal proceeding is considered probable and the amount can be reasonably estimated, we accrue a provision for the estimated loss. Management’s judgment must be exercised to determine the likelihood of such a loss and an estimate of the amount, due to the subjective nature of the loss. Valuation of financial instruments We are required to measure all derivative financial instruments at fair value. The fair values of derivative financial instruments are determined considering quoted prices in recognized markets. If such instruments are not traded, fair value is determined by applying techniques based upon technical models supported by sufficient reliable and verifiable data, recognized in the financial sector. We base our forward price curves upon market price quotations. Management believes that the chosen valuation techniques and assumptions used are appropriate in determining the fair value of financial instruments; see Note 20 to our audited consolidated financial statements. Business combinations Acquisitions of businesses are accounted for using the acquisition method. The consideration transferred in a business combination is measured at fair value, which is calculated as the sum of the acquisition-date fair values of the assets transferred by us, liabilities assumed by us to the former owners of the acquiree and the equity interests issued by us in At the acquisition date, the identifiable assets acquired and the liabilities assumed are
Pursuant to Rule 303A.11 of the Listed Company Manual of the NYSE, we are required to provide a summary of the significant ways in which our corporate governance practices differ from those required for U.S. companies under the NYSE listing standards. We are a Mexican corporation with shares listed on the Mexican Stock Exchange. Our corporate governance practices are governed by our bylaws, the Mexican Securities Law and the regulations issued by the CNBV. We also disclose the extent of compliance with theCódigo de Mejores Prácticas Corporativas (Mexican Code of Best Corporate Practices), which was created by a group of Mexican business leaders and was endorsed by the CNBV. The table below discloses the significant differences between our corporate governance practices and the NYSE standards.
See pages F-1 through
SIGNATURE The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf. Date: April
FOMENTO ECONÓMICO MEXICANO, S.A.B. DE C.V. AND SUBSIDIARIES MONTERREY, N.L., MÉXICO
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Fomento Económico Mexicano, S.A.B. de C.V. We have audited the accompanying consolidated We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement In our opinion, based on our audits and the report of other auditors, the We have also Mancera, S.C.
Monterrey, N.L., April FOMENTO ECONÓMICO MEXICANO, S.A.B. DE C.V. AND SUBSIDIARIES MONTERREY, N.L., Consolidated
Amounts expressed in millions of U.S. dollars ($) and in millions of Mexican pesos (Ps.)
The accompanying notes are an integral part of these consolidated
FOMENTO ECONÓMICO MEXICANO, S.A.B. DE C.V. AND SUBSIDIARIES MONTERREY, N.L., Consolidated Income Statements For the years ended December 31, Amounts expressed in millions of U.S. dollars ($) and in millions of Mexican pesos (Ps.), except
The accompanying notes are an integral part of these consolidated income statements. FOMENTO ECONÓMICO MEXICANO, S.A.B. DE C.V. AND SUBSIDIARIES MONTERREY, N.L., Consolidated Statements of For the years ended December 31, Amounts expressed in millions of U.S. dollars ($) and in millions of Mexican pesos (Ps.)
The accompanying notes are an integral part of Cash Flow Generated by (Used in) Financing Activities: Bank loans obtained Bank loans paid Interest paid Dividends declared and paid Acquisition of non-controlling interest Other liabilities Net cash flows used in financing activities by continuing operations Net cash flows used in financing activities by discontinued operations Net cash flows used in financing activities Net cash flows by continuing operations Net cash flows by discontinued operations Net cash flows Translation and restatement effect on cash and cash equivalents Initial cash Initial cash of discontinued operations Initial cash and cash equivalents Ending balance Ending balance by discontinued operations Total ending balance of cash and cash equivalents, net
FOMENTO ECONÓMICO MEXICANO, S.A.B. DE C.V. AND SUBSIDIARIES MONTERREY, N.L., Consolidated Statements of Changes in For the years ended December 31, Amounts expressed in millions of Mexican pesos (Ps.)
The accompanying notes are an integral part of these consolidated statements of changes in FOMENTO ECONÓMICO MEXICANO, S.A.B. DE C.V. AND SUBSIDIARIES MONTERREY, N.L., MEXICO
For the years ended December 31, Amounts expressed in millions of U.S. dollars ($) and in millions of Mexican pesos (Ps.)
The accompanying notes are an integral part of these consolidated statements of cash flow. FOMENTO ECONÓMICO MEXICANO, S.A.B. DE C.V. AND SUBSIDIARIES MONTERREY, N.L., MEXICO Notes to the Consolidated Financial Statements As of December 31, 2014, 2013 and 2012. Amounts expressed in millions of U.S. dollars ($) and in millions of Mexican pesos (Ps.) Note 1. Activities of the Company Fomento Económico Mexicano, S.A.B. de C.V. (“FEMSA”) is a Mexican holding company. The principal activities of FEMSA and its subsidiaries (the “Company”), as an economic unit, are carried out by operating subsidiaries and
The following is a description of the activities of the Company as of the date of the issuance of these consolidated financial statements, together with the ownership interest in each Subholding Company:
Note 2. Basis of 2.1 Statement of compliance The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”). The Company’s consolidated financial statements and notes were authorized for issuance by the Company’s Chief Executive Officer Carlos Salazar Lomelín and Chief Financial and Administrative Officer Javier Astaburuaga Sanjines on February 20, 2015. Those consolidated financial statements and notes were then approved by the Company’s Board of Directors on February 25, 2015 and by the Shareholders on March 19, 2015. The accompanying consolidated financial statements were 2.2 Basis of The consolidated financial statements Available-for-sale investments. Derivative financial instruments. Long-term notes payable on which fair value hedge accounting is applied. Trust assets of post-employment and other long-term employee benefit plans. The financial statements of 2.2.1 Presentation of consolidated income statement The Company classifies its costs and expenses by function in the consolidated income statement, in order to conform to the 2.2.2 Presentation of consolidated statements of cash flows The
The consolidated financial statements are
2.3 Critical accounting judgments and In the application of the Company’s accounting policies, which are described in Note 3, management is required to make judgments, estimates and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimate is revised if the revision affects only that period or in the period of the revision and future periods if the revision affects both current and future periods. 2.3.1 Key sources of estimation uncertainty The following are the key assumptions concerning the future and other key sources of estimation uncertainty at the end of the reporting period that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year. Existing circumstances and assumptions about future developments, however, may change due to market changes or circumstances arising beyond the control of the Company. Such changes are reflected in the assumptions when they occur. 2.3.1.1 Impairment of indefinite lived intangible assets, goodwill and depreciable long-lived assets Intangible assets with indefinite lives including goodwill are subject to annual impairment tests. An impairment exists when the carrying value of an asset or cash generating unit (CGU) exceeds its recoverable amount, which is the higher of its fair value less costs to sell and its value in use. The fair value less costs to sell calculation is based on available data from binding sales transactions in arm’s length transactions of similar assets or observable market prices less incremental costs for disposing of the asset. In order to determine whether such assets are impaired, the Company initially calculates an estimation of the value in use of the cash-generating units to which such assets have been allocated. The value in use calculation requires management to estimate the future cash flows expected to arise from the cash-generating unit and a suitable discount rate in order to calculate present value. The Company reviews annually the carrying value of its intangible assets with indefinite lives and goodwill for impairment based on recognized valuation techniques. While the Company believes that its estimates are reasonable, different assumptions regarding such estimates could materially affect its evaluations. Impairment losses are recognized in current earnings in the period the related impairment is determined. The key assumptions used to determine the recoverable amount for the Company’s CGUs, including a sensitivity analysis, are further explained in Notes 3.16 and 12. The Company assesses at each reporting date whether there is an indication that an asset may be impaired. If any indication exists, or when annual impairment testing for an asset is required, the Company estimates the asset’s recoverable amount. When the carrying amount of an asset or CGU exceeds its recoverable amount, the asset is considered impaired and is written down to its recoverable amount. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. In determining fair value less costs to sell, recent market transactions are taken into account, if available. If no such transactions can be identified, an appropriate valuation model is used. These calculations are corroborated by valuation multiples, quoted share prices for publicly traded subsidiaries or other available fair value indicators. 2.3.1.2 Useful lives of property, plant and equipment and intangible assets with defined useful lives Property, plant and equipment, including returnable bottles as they are expected to provide benefits over a period of more than one year, as well as intangible assets with defined useful lives are depreciated/amortized over their estimated useful lives. The Company bases its estimates on the experience of its technical personnel as well as based on its experience in the industry for similar assets, see Notes 3.12, 3.14, 11 and 12. 2.3.1.3 Post-employment and other long-term employee benefits The Company regularly evaluates the reasonableness of the assumptions used in its post-employment and other long-term employee benefit computations. Information about such assumptions is described in Note 16. 2.3.1.4 Income taxes Deferred income tax assets and liabilities are determined based on the differences between the financial statement carrying amounts and the tax basis of assets and liabilities. The Company regularly reviews its deferred tax assets for recoverability, and records a deferred tax asset based on its judgment regarding the probability of historical taxable income continuing in the future, projected future taxable income and the expected timing of the reversals of existing temporary differences, see Note 24. 2.3.1.5 Tax, labor and legal contingencies and provisions The Company is subject to various claims and contingencies related to tax, labor and legal proceedings as described in Note 25. Due to their nature, such legal proceedings involve inherent uncertainties including, but not limited to, court rulings, negotiations between affected parties and governmental actions. Management periodically assesses the probability of loss for such contingencies and accrues a provision and/or discloses the relevant circumstances, as appropriate. If the potential loss of any claim or legal proceeding is considered probable and the amount can be reasonably estimated, the Company accrues a provision for the estimated loss. Management’s judgement must be excercised to determine the likelihood of such a loss and an estimate of the amount, due to the subjective nature of the loss. 2.3.1.6 Valuation of financial instruments The Company is required to measure all derivative financial instruments at fair value. The fair values of derivative financial instruments are determined considering quoted prices in recognized markets. If such instruments are not traded, fair value is determined by applying techniques based upon technical models supported by sufficient reliable and verifiable data, recognized in the financial sector. The Company bases its forward price curves upon market price quotations. Management believes that the chosen valuation techniques and assumptions used are appropriate in determining the fair value of financial instruments, see Note 20. 2.3.1.7 Business combinations Acquisitions of businesses are accounted for using the acquisition method. The consideration transferred in a business combination is measured at fair value, which is calculated as the sum of the acquisition-date fair values of the assets transferred by the Company, liabilities assumed by the Company to the former owners of the acquiree and the equity interests issued by the Company in exchange for control of the acquiree. At the acquisition date, the identifiable assets acquired and the liabilities assumed are recognized at their fair value, except that:
Management’s judgement must be exercised to determine the fair value of assets acquired and liabilities assumed. Goodwill is measured as the excess of the sum of the consideration transferred, the amount of any non-controlling interests in the acquiree, and the fair value of the Company previously held equity interest in the acquiree (if any) over the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed. If, after reassessment, the net of the acquisition-date amounts of the identifiable assets acquired and liabilities assumed exceeds the sum of the consideration transferred, the amount of any non-controlling interests in the acquiree and the fair value of the Company previously held interest in the acquiree (if any), the excess is recognized immediately in profit or loss as a bargain purchase gain. For each business combination, with respect to the non-controlling present ownership interests in the acquiree that entitle their holders to a proportionate share of net assets in liquidation, the Company elects whether to measure such interest at fair value or at the proportionate share of the acquiree’s identifiable net assets. 2.3.1.8 Investments in associates If the Company holds, directly or indirectly, 20 per cent or more of the voting power of the investee, it is presumed that it has significant influence, unless it can be clearly demonstrated that this is not the case. If the Company holds, directly or indirectly, less than 20 per cent of the voting power of the investee, it is presumed that the Company does not have significant influence, unless such influence can be clearly demonstrated. Decisions regarding the propriety of utilizing the equity method of accounting for a less than 20 per cent-owned corporate investee requires a careful evaluation of voting rights and their impact on the Company’s ability to exercise significant influence. Management considers the existence of the following circumstances which may indicate that the Company is in a position to exercise significant influence over a less than 20 per cent-owned corporate investee: Representation on the board of directors or equivalent governing body of the investee; Participation in policy-making processes, including participation in decisions about dividends or other distributions; Material transactions between the Company and the investee; Interchange of managerial personnel; or Provision of essential technical information. Management also considers the existence and effect of potential voting rights that are currently exercisable or currently convertible when assessing whether the Company has significant influence. In addition, the Company evaluates certain Whether the extent of the Company’s ownership is significant relative to other shareholders (i.e., a lack of concentration of other shareholders); Whether the Company’s significant shareholders, fellow subsidiaries, or officers hold additional investment in the investee; and Whether the Company is a part of significant investee committees, such as the executive committee or the finance committee. 2.3.1.9 Joint arrangements An arrangement can be a joint arrangement even though not all of its parties have joint control of the arrangement. When the Company is a party to an arrangement it shall assess whether the contractual arrangement gives all the parties, or a group of the parties, control of the arrangement collectively; joint control exists only when decisions about the relevant activities require the unanimous consent of the parties that control the arrangement collectively. Management needs to apply judgment when assessing whether all the parties, or a group of the parties, have joint control of an arrangement. When assessing joint control, management considers the following facts and circumstances:
As mentioned in Note 10, on January 25, 2013, Coca-Cola FEMSA closed the acquisition of 51% of Coca-Cola FEMSA Philippines, Inc (CCFPI) (formerly Coca-Cola Bottlers Philippines, Inc.). Coca-Cola FEMSA jointly controls CCFPI with TCCC. This is based on the following factors: (i) during the initial four-year period, some relevant activities require joint approval between Coca-Cola FEMSA and TCCC; and (ii) potential voting rights to acquire the remaining 49% of CCFPI are not likely to be exercised in the foreseeable future due to the fact that the call option is “out of the money” as of December 31, 2014 and 2013. 2.3.1.10 Venezuela exchange rates As is further explained in Note 3.3 below, the exchange rate used to account for 2.4 Changes in accounting policies The Company has adopted the following new IFRS and amendments to IFRS, during 2014:
Annual Improvements 2010-2012 Cycle Annual Improvements 2011-2013 Cycle
The nature and the effect of the changes are further explained below. Amendments to IAS 32,Offsetting Financial Assets and Financial Liabilities Amendments to IAS 32, “Offsetting Financial Assets and Financial Liabilities”, clarify existing application issues relating to the offsetting requirements. Specifically, the amendments clarify the meaning of ‘currently has a legally enforceable right of set-off’ and ‘simultaneous realization and settlement’. The amendments to IAS 32 are effective for annual periods beginning on or after January 1, 2014, with retrospective application required. The Company adopted these amendments, which had no impact on its consolidated financial statements because the Company´s policy for offsetting financial instruments was already in accordance with Amendments to IAS 36,Impairment of Assets Amendments to IAS 36 “Impairment of Assets”, reduce the circumstances in which Amendments to IAS 39,Financial Instruments: Recognition and Measurement Amendments to IAS 39 “Financial Instruments: Recognition and Measurement” clarify that there is no need to discontinue hedge accounting if a hedging derivative is novated, provided certain criteria are met. A novation indicates an event where the original parties to a derivative agree that one or more clearing counterparties replace their original counterparty to become the new counterparty to each of the parties. In order to apply the amendments and continue hedge accounting, novation to a central counterparty (CCP) must happen as a consequence of laws or regulations or the introduction of laws or regulations. The amendments to IAS 39 are effective for annual periods beginning on or after January 1, 2014. The Company adopted these amendments and they had no impact on the Company´s consolidated financial statements because the Company did not have novated derivatives designated as hedging instruments. Annual Improvements 2010-2012 Cycle Annual Improvements 2010-2012 Cycle includes amendments to: IFRS 2 Annual Improvements 2011-2013 Cycle Annual Improvements 2011-2013 Cycle includes amendments to: IFRS 13, clarifying the scope of the portfolio exception of paragraph 52, which permits an entity to measure the fair value of a group of financial assets and financial liabilities on the basis of the price that would be received to sell a net long position for a particular risk exposure or to transfer a net short position for a particular risk exposure in an orderly transaction between market participants at the measurement date under current market conditions. The amendments clarify that the portfolio exception in IFRS 13 can be applied not only to financial assets and financial liabilities, but also to other contracts within the scope of IAS 39. These improvements are applicable to annual periods beginning on or after July 1, 2014. The Company adopted these amendments and they had no impact on the Company´s consolidated financial statements, because it has no instruments it manages on a net basis. IFRIC 21,Levies IFRIC 21 Levies, provides guidance on when to recognize a liability for a levy imposed by a government, both for levies that are accounted for in accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets and those where the timing and amount of the levy is certain. This interpretation is effective for accounting periods beginning on or after January 1, 2014, with early adoption permitted. The Company adopted this interpretation and it had no impact on the financial statements because taxes other than income and consumption taxes are recorded at the time the event giving rise to the payment obligation arises. Note 3. Significant Accounting Policies 3.1 Basis of consolidation The Specifically, the Company controls an investee if and only if the Company has: Power over the investee (i.e. existing rights that give it the current ability to direct the relevant activities of Exposure, or rights, to variable returns from its involvement with the investee; and The ability to use its power over the investee to affect its returns. When the Company has less than a majority of the voting or similar rights of an investee, the Company considers all relevant facts and circumstances in assessing whether it has power over an investee, including: The contractual arrangements with the other vote holders of the investee; Rights arising from other contractual arrangements; and The Company’s voting rights and potential voting rights. The Company re-assesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one or more of the three elements of control. Consolidation of a subsidiary begins when the Company obtains control over the subsidiary and ceases when the Company loses control of the subsidiary. Assets, liabilities, income and expenses of a subsidiary acquired Consolidated net income and each component of
3.1.1 Acquisitions of non-controlling interests Acquisitions of non-controlling interests are accounted for as transactions with owners in their capacity as owners and 3.1.2 Loss of control Upon the loss of control, the Company derecognizes the assets (including goodwill) and liabilities of the subsidiary, any non-controlling interests, cumulative translation differences recorded in equity and the other
3.2 Business combinations Business combinations are accounted for The Company
The
Any contingent consideration payable is recognized at fair value at the If the initial accounting for a business combination is incomplete by the end of the reporting period in which the combination occurs, the Company reports provisional amounts for the items for which the accounting is incomplete, and discloses that its allocation is preliminary in nature. Those provisional amounts are adjusted during the measurement period (not greater than 12 months), or additional assets or liabilities are recognized, to
In preparing the financial statements of each individual subsidiary and accounting for investments in associates and joint ventures, transactions in currencies other than the individual entity’s functional currency (foreign currencies) are recognized at the rates of exchange prevailing at the dates of the transactions. At the end of each reporting period, monetary items denominated in foreign currencies are retranslated at the rates prevailing at that Exchange differences on monetary items are recognized in consolidated net income in the period in which they arise except for: The variations in the net investment in foreign subsidiaries generated by exchange rate fluctuation which are included as part of the exchange differences on translation of foreign operations within the cumulative other comprehensive income (loss) item, which is recorded in equity. Intercompany financing balances with Exchange differences on transactions entered into in order to
For incorporation into the Company’s consolidated financial statements, each foreign
For
For
Country or Zone Guatemala Costa Rica Panama Colombia Nicaragua Argentina Venezuela Brazil Euro Zone Philippines The Company has operated under exchange controls in Venezuela since 2003 that affect its ability to remit dividends abroad or make payments other than in local currencies and that may increase the real price
As of December 31, 2014, the official exchange rate was 6.30 bolivars per U.S. dollar (2.34 Mexican peso per bolivar), the SICAD-I exchange rate was 12.00 bolivars per US dollar (1.23 Mexican peso per bolivar), and the SICAD-II exchange rate was 49.99 bolivars per US dollar (0.29 Mexican peso per bolivar). The Company’s recognition of its Venezuela operations involves a two-step accounting process in order to translate into bolivars all transactions in a different currency than the Venezuelan currency and then to translate to Mexican Pesos. Step-one.- Transactions are first recorded in the stand-alone accounts of the Venezuelan As of December 31, 2014 Coca-Cola FEMSA had US $ 449 million in monetary liabilities recorded using the official exchange rate. The Company believes that these payables for imports of essential goods should continue to qualify for settlement at the official exchange rate. If there is a change in the official exchange rate in the future, or should we determine these amounts no longer qualify, we will recognize the impact of this change in the income statement. Step-two.- In order to integrate the results of the Venezuelan operations into the consolidated figures of the Company, such Venezuelan results are translated from Venezuelan bolivars into Mexican pesos. During the first three quarters of 2014, the Company used SICAD-I exchange rate as the rate for the translation of the Venezuelan amounts based on the expectation this would have been the exchange rate at which dividends will be settled. During the fourth quarter, the Company decided to move from SICAD-I to SICAD-II exchange rate to reflect its revised estimate. In accordance with IAS 21 and given the fact that Venezuela is considered a hyper-inflationary economy, we have translated the results for the entire year using SICAD II exchange rate. Prior to 2014, the Company used the official exchange rate of 6.30 and 4.30 bolivars per US dollar As a result of Official exchange rates for Argentina are published by the Argentine Central Bank. The Argentine peso has experienced significant devaluation over the past several years and the government has adopted various rules and regulations since late 2011 that established new restrictive controls on capital flows into the country. These enhanced exchange controls have practically closed the foreign exchange market to retail transactions. It is widely reported that the Argentine peso/U.S. dollar exchange rate in the unofficial market substantially differs from the official foreign exchange rate. The Argentine government could impose further exchange controls or restrictions on the movement of capital and take other measures in the future in response to capital flight or a significant depreciation of the
In addition, in relation to a partial disposal of a subsidiary that does not result in the Company losing control over the subsidiary, the proportionate share of accumulated exchange differences are re-attributed to non-controlling interests and are not recognized in profit or loss. For all other partial disposals (i.e., partial disposals of associates or joint ventures that do not result in the Company losing significant influence or joint control), the proportionate share of the accumulated exchange differences is reclassified to profit or loss. Goodwill and fair value adjustments on identifiable assets and liabilities acquired arising on the acquisition of a foreign operation are treated as assets and liabilities of the foreign operation and translated at the rate The translation of assets and liabilities denominated in foreign currencies into Mexican pesos is for consolidation purposes and does not indicate that the Company could realize or settle the reported value of those assets and liabilities in Mexican pesos. Additionally, this does not indicate that the Company could return or distribute the reported Mexican peso value equity to its shareholders.
The
Using inflation factors to restate non-monetary assets, such as inventories,
Applying the appropriate inflation factors to restate capital stock, additional paid-in capital, net income, retained earnings and
Including The Company restates the financial information of During 2014, the International Monetary Fund (IMF) issued a declaration of censure and called on Argentina to adopt remedial measures to address the quality of its official inflation data. The Mexico Guatemala Colombia Brazil Panama Euro Zone Argentina Venezuela Nicaragua(1) Costa Rica(1) 3.5 Cash and Cash is measured at nominal value and consists of non-interest bearing bank The Company also maintains restricted cash held as collateral to meet certain contractual obligations (see Note 9.2). Restricted cash is presented within other current financial assets given that the restrictions are short-term in nature.
Financial assets are classified into the following specified categories: “fair value through profit or loss (FVTPL) ,” “held-to-maturity investments,” “available-for-sale” and “loans and receivables” or as derivatives designated as hedging instruments in an effective hedge, as appropriate. The classification depends on the nature and purpose of When a financial asset is recognized initially, the Company The fair value of an asset or a liability is measured using the assumptions that market participants would use when pricing the asset or liability, assuming that market participants act in their economic best interest. The Company’s financial assets include cash, cash equivalents and restricted cash, 3.6.1 Effective interest rate method The effective interest rate method is
Investments consist of debt securities and bank deposits with maturities of more than three 3.6.2.1 Available-for-sale investments are those non-derivative financial assets that are designated as available for sale or are not classified as
3.6.2.2Held-to maturity investments are those that the Company has the positive intent and ability to hold to maturity, and after initial measurement, such financial assets are 3.6.3 Loans and receivables Loans and receivables are non-derivative financial instruments with fixed or determinable payments that are not quoted in an active market. Loans and receivables with a
Interest income is recognized by applying the effective interest rate, except for
3.6.4 Other financial assets Other financial assets include long term accounts receivable and derivative financial instruments. Long term accounts receivable with a stated term are measured at amortized cost using the effective interest method, less any impairment. 3.6.5 Impairment of financial assets Financial assets, other than those at FVTPL, are assessed for indicators of impairment at the end of each reporting period. Financial assets are considered to be impaired when there is objective evidence that, as a result of one or more events that occurred after the initial recognition of the financial asset, (an incurred “loss event”) and that loss event has an impact on the estimated future cash flows of the financial assets that can be reliably estimated. Evidence of impairment may include indicators as follows: Significant financial difficulty of the issuer or counterparty; or
It becoming probable that the borrower will enter bankruptcy or financial re-organization; or The disappearance of an active market for that financial asset because of financial difficulties. For financial assets carried at amortized cost, the amount of the impairment loss recognized is the difference between the asset’s carrying amount and The carrying amount of the financial asset is reduced by the impairment loss directly for all financial assets with the exception of trade receivables, where the carrying amount is reduced through the use of an allowance for doubtful accounts. When a trade receivable is considered uncollectible, it is written off against the allowance account. Subsequent recoveries of amounts previously written off are credited against the allowance account. Changes in the carrying amount of the allowance account are recognized in consolidated net income. No impairment was recognized for the years ended December 31, 2014 and 3.6.6 Derecognition A financial asset (or, where applicable, a part of a financial asset or part of a group of similar financial assets) is derecognized when: The rights to The Company has transferred its rights to receive cash flows from the asset or has assumed an obligation to pay the received cash flows in full without material delay to a third party under a ‘pass-through’ arrangement; and either (a) the Company has transferred substantially all the risks and rewards of the asset, or (b) the Company has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset. 3.6.7 Offsetting of financial instruments Financial assets are required to be offset against financial liabilities and the net amount reported in the consolidated statement of financial position if, and only when the Company: Currently has an enforceable legal right to offset the recognized amounts; and
The Company is exposed to different risks related to cash flows, liquidity, market and third party credit. As a result, the Company contracts The Company values and records all derivative financial instruments and hedging activities,
3.7.1 Hedge accounting The Company designates At the inception of the hedge relationship, the Company documents the relationship between the hedging instrument and the hedged item, along with its risk management objectives and its strategy for undertaking various hedge transactions. Furthermore, at the inception of the hedge and on an ongoing basis, the Company documents whether the hedging instrument is highly effective in offsetting changes in fair values or cash flows of the hedged item attributable to the hedged risk. 3.7.2 Cash flow hedges The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognized in other comprehensive income and accumulated under the heading valuation of the effective portion of derivative financial instruments. The gain or loss relating to the ineffective portion is recognized immediately in consolidated net income, and is included in the market value (gain) loss on financial instruments line item within the consolidated income statements. Amounts previously recognized in other comprehensive income and accumulated in equity are reclassified to consolidated net income in the periods when the hedged item is recognized in consolidated net income, in the same line of the consolidated income statement as the recognized hedged item. However, when the hedged forecast transaction results in the recognition of a non-financial asset or a non-financial liability, the gains and losses previously recognized in other comprehensive income and accumulated in equity are transferred from equity and included in the initial measurement of the cost of the non-financial asset or non-financial liability. Hedge accounting is discontinued when the Company revokes the hedging relationship, when 3.7.3 Fair value hedges The change in the fair value loss. The For fair value hedges relating to items carried at amortized cost, any adjustment to carrying value is amortized through profit or loss over the remaining term of the hedge using the EIR method. EIR amortization may begin as soon as an adjustment exists and no later than when the hedged item ceases to be adjusted for changes in its fair value attributable to the risk being hedged. If the hedged item is derecognized, the unamortized fair value is recognized immediately in profit or loss. When an unrecognized firm commitment is designated as a hedged item, the subsequent cumulative change in the fair value of the firm commitment attributable to the hedged risk is recognized as an asset or liability with a corresponding gain or loss recognized in the consolidated net income. 3.8 Fair value measurement The Company measures financial instruments, such as derivatives, and non-financial assets, at fair value at each balance sheet date. Also, fair values of financial instruments measured at amortized cost are disclosed in Notes 13 and 18. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the In the principal market for the asset or liability; or In the absence of a principal market, in the most advantageous market for the asset or liability. A fair value measurement of a non-financial asset takes into account a market participant’s ability to generate economic benefits by using the asset in its highest and best use or by selling it to another market participant that would use the asset in its highest and best use. The Company uses valuation techniques that are appropriate in the circumstances and for which sufficient data are available to measure fair value, maximizing the use of relevant observable inputs and minimizing the use of unobservable inputs. All assets and liabilities for which fair value is measured or disclosed in the financial statements are categorized within the fair value hierarchy, described as follows, based on the lowest level input that is significant to the fair value measurement as a whole: Level 1 — Quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 2 — Inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly or indirectly. Level 3 — Are unobservable inputs for the asset or liability. Unobservable inputs shall be used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date. For assets and liabilities that are recognized in the financial statements on a recurring basis, the Company determines whether transfers have occurred between Levels in the hierarchy by re-assessing categorization (based on the lowest level input that is significant to the fair value measurement as a whole) at the end of each reporting period. The Company determines the policies and procedures for both recurring fair value measurements, such as those described in Note 20 and unquoted liabilities such as debt described in Note 18. For the purpose of fair value disclosures, the Company has determined classes of assets and liabilities on the basis of the nature, characteristics and risks of the asset or liability and the level of the fair value hierarchy as explained above. 3.9 Inventories and cost of goods sold Inventories are measured at the lower of cost and net realizable value. Net realizable value represents the estimated selling price for inventories less all estimated costs of completion and costs necessary to make the sale. Inventories represent the acquisition or production cost which is incurred when purchasing or producing a product, and are based on the weighted average cost formula. The operating segments of the Company use inventory costing methodologies to value their inventories, such as the weighted average cost method in Coca-Cola FEMSA and retail method in FEMSA Comercio. Cost of goods sold is based on average cost of the inventories at the time of sale. Cost of goods sold in Coca-Cola FEMSA includes expenses related to the purchase of raw materials used in the production process, as well as labor costs (wages and other benefits), depreciation of production facilities, equipment and other costs, including fuel, electricity, equipment maintenance, inspection and plant transfers costs. Cost of goods sold in FEMSA Comercio includes expenses related to the purchase of goods and services used in the sale process of the Company´s products. 3.10 Other current assets Other current assets, which will be realized within a period of less than one year from the reporting date, are comprised of prepaid assets and agreements with customers. Prepaid assets principally consist of advances to suppliers of raw materials, advertising, promotional, leasing and insurance costs, and are recognized as other current assets at the time of the cash disbursement. Prepaid assets are carried to the appropriate caption in the income statement when inherent benefits and risks have already been transferred to the Company or services have been received. The Company has prepaid advertising costs which consist of television and radio advertising airtime paid in advance. These expenses are generally amortized over the period based on the transmission of the television and radio spots. The related production costs are recognized in consolidated net income as incurred. Coca-Cola FEMSA has agreements with customers for the right to sell and promote Coca-Cola FEMSA’s products over a certain period. The majority of these agreements have terms of more than one year, and the related costs are amortized using the straight-line method over the term of the contract, with amortization presented as a reduction of net sales. During the years ended December 31, 2014, 2013 and 2012, such amortization aggregated to Ps. 338, Ps. 696 and Ps. 970, respectively. 3.11 Investments in associates and joint arrangements 3.11.1 Investments in associates Associates are those entities over which the Company has significant influence. Significant influence is the power to participate in the financial and operating policy decisions of the investee, but is not control over those policies. Investments in associates are accounted for using the equity method and initial recognition comprises the investment’s purchase price and any directly attributable expenditure necessary to acquire it. The consolidated financial statements include the Company’s share of the consolidated net income and other comprehensive income, after adjustments to align the accounting policies with those of the Company, from the date that significant influence commences until the date that significant influence ceases. Profits and losses resulting from ‘upstream’ and ‘downstream’ transactions between the Company (including its consolidated subsidiaries) and an associate are recognized in the consolidated When the Company’s share of losses exceeds the carrying amount of the associate, including any long-term investments, the carrying amount is reduced to nil and recognition of further losses is discontinued except to the extent that the Company has a legal or constructive obligation to pay the associate or has made payments on behalf of the associate. Goodwill identified at the acquisition date is presented as part of the investment in shares of the associate in the consolidated statement of financial position. Any goodwill arising on the acquisition of the Company’s interest in an associate is measured in accordance with the Company’s accounting policy for goodwill arising in a business combination, see Note 3.2. After application of the equity method, the Company determines whether it is necessary to recognize an additional impairment loss on its investment in its associate. The 3.11.2 Joint arrangements A joint arrangement is an arrangement of which two or more parties have joint control. Joint control is the Joint venture is a joint arrangement whereby the parties that have joint control of the arrangement have rights to the net After application of
its investment in its joint venture. The 3.12 Property, plant and equipment Property, plant and equipment are initially recorded at their cost of acquisition and/or construction, and are presented net of accumulated depreciation and/or accumulated impairment losses, if any. The borrowing costs related to the acquisition or construction of qualifying asset is capitalized as part of the cost of that asset. Major maintenance costs are capitalized as part of total acquisition cost. Routine maintenance and repair costs are expensed as incurred. Investments in progress consist of long-lived assets not yet in service, in other words, that are not yet used for the purpose that they were bought, built or developed. The Company expects to complete those investments during the following 12 months. Depreciation is computed using the straight-line method over the asset’s estimated useful life. Where an item of property, plant and equipment comprises major components having different useful lives, they are accounted and depreciated for as separate items (major components) of property, plant and equipment. The Company estimates depreciation rates, considering the estimated useful lives of the assets. The estimated useful lives of the Company’s principal assets are as follows:
The estimated useful lives, residual values and depreciation method are reviewed at the end of each reporting period, with the effect of any changes in An item of property, plant and equipment is derecognized upon disposal or when no future economic benefits are expected to arise from the Returnable and non-returnable bottles: Coca-Cola FEMSA has two types of bottles: returnable and non-returnable. Non returnable: Are recorded in consolidated net income at the time of product sale. Returnable: Are classified as long-lived assets as a component of property, plant and equipment. Returnable bottles are recorded at acquisition cost; and for countries with hyperinflationary economies, restated according to IAS 29, “Financial Reporting in Hyperinflationary Economies.” Depreciation of returnable bottles is computed using the straight-line method considering their estimated useful lives. There are two types of returnable bottles: Those that are in Coca-Cola FEMSA’s control within its facilities, plants and distribution centers; and Those that have been placed in the hands of customers, but still belong to Coca-Cola FEMSA. Returnable bottles that have been placed in the hands of customers are subject to an agreement with a retailer pursuant to which Coca-Cola FEMSA retains ownership. These bottles are monitored by sales personnel during periodic visits to retailers and Coca-Cola FEMSA has the right to charge any breakage identified to the retailer. Bottles that are not subject to such agreements are expensed when placed in the hands of retailers. Coca-Cola FEMSA’s returnable bottles are depreciated according to their estimated useful lives (3 years for glass bottles and 1.5 years for PET bottles). Deposits received from customers are amortized over the same useful estimated lives of the bottles. 3.13 Borrowing costs Borrowing costs directly attributable to the acquisition, construction or production of qualifying assets, which are assets that necessarily take a substantial period of time to get ready for their intended use or sale, are added to the cost of those assets, until such time as the assets are substantially ready for their intended use or sale. Borrowing costs may include: Interest expense; and Exchange differences arising from foreign currency borrowings to the extent that they are regarded as an adjustment Interest income earned on the temporary investment of specific borrowings pending their expenditure on qualifying assets is deducted from the borrowing costs eligible for capitalization. All other borrowing costs are recognized in consolidated net income in the period in which they are incurred. 3.14 Intangible assets Intangible assets are identifiable non monetary assets without physical substance and represent payments whose benefits will be received in future years. Intangible assets acquired separately are measured on initial recognition at cost. The cost of intangible assets acquired in a business combination is their fair value as at the date of acquisition (see Note 3.2). Following initial recognition, intangible assets are carried at cost less any accumulated amortization and accumulated impairment losses. The useful lives of intangible assets are assessed as either finite or indefinite, in accordance with the period over which the Company expects to receive the benefits. Intangible assets with finite useful lives are amortized and mainly consist of: Information technology and management system costs incurred during the development stage which are currently in use. Such amounts are capitalized and then amortized using the straight-line method over their expected useful lives, with a range in useful lives from 3 to 10 years. Expenses that do not fulfill the requirements for capitalization are expensed as incurred. Long-term alcohol licenses are amortized using the straight-line method over their estimated useful lives, which range between 12 and 15 years, and are presented as part of intangible assets with finite useful lives. Amortized intangible assets, such as finite lived intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or group of assets may not be recoverable through its expected future cash flows. Intangible assets with an indefinite life are not amortized and are subject to impairment tests on an annual basis as well as whenever certain circumstances indicate that the carrying amount of those intangible assets exceeds their recoverable value. The Company’s intangible assets with an indefinite life mainly consist of rights to produce and distribute Coca-Cola trademark products in the Company’s territories. These rights are contained in agreements that are standard contracts that The Coca-Cola Company has with its bottlers. As of December 31, 2014, Coca-Cola FEMSA had nine bottler agreements in Mexico: (i) the agreements for the Valley of Mexico, which are up for renewal in April 2016 and June 2023, (ii) the agreements for the Central territory, which are up for renewal in May 2015 (three agreements) and July 2016, (iii) the agreement for the Northeast territory, which is up for revewal in May 2015 (iv) the agreement for the Bajio territory, which is up for renewal in May 2015, and (v) the agreement for the Southeast territory, which is up for revewal in June 2023. As of December 31, 2014, Coca-Cola FEMSA had four bottler agreements in Brazil, which are up for renewal in October 2017 (two agreements) and April 2024 (two agreements). The bottler agreements with The Coca-Cola Company will expire for territories in other countries as follows: Argentina, which is up for renewal in September 2024; Colombia, which is up for renewal in June 2024; Venezuela, which is up for renewal in August 2016; Guatemala, which is up for renewal in March 2025; Costa Rica, which is up for renewal in September 2017; Nicaragua, which is up for renewal in May 2016 and Panama, which is up for renewal in November 2024. All of these bottler agreements are automatically renewable for ten-year terms, subject to the right of either party to give prior notice that it does not wish to renew the applicable agreement. In addition, these agreements generally may be terminated in the case of material breach. Termination would prevent Coca-Cola FEMSA from selling Coca-Cola trademark beverages in the affected territory and would have an adverse effect on the Company´s business, financial conditions, results from operations and prospects. 3.15 Non-current assets held for sale Non-current assets and disposal groups are classified as held for sale if their carrying amount will be recovered principally through a sale transaction rather than through continuing use. This condition is regarded as met only when the sale is highly probable and the non-current asset (or disposal group) is available for immediate sale in its present condition. Management must be committed to the sale, which should be expected to qualify for recognition as a completed sale within one year from the date of classification. When the Company is committed to a Non-current assets (and disposal groups) classified as held for sale are measured at the lower of their previous carrying amount and fair value less costs to sell. 3.16 Impairment of non financial assets At the end of each reporting period, the Company reviews the carrying amounts of its tangible and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Where it is not possible to estimate the recoverable amount of an individual asset, the Company estimates the recoverable amount of the cash-generating unit to which the asset belongs. Where a reasonable and consistent basis of allocation can be identified, corporate assets are also allocated to individual CGUs, or otherwise they are allocated to the smallest CGUs for which a reasonable and consistent allocation basis can be identified. For goodwill and other indefinite lived intangible assets, the Company tests for impairment on an annual basis and whenever certain circumstances indicate that the carrying amount of the cash generating unit might exceed its recoverable amount. Recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted. If the recoverable amount of an asset (or CGU) is estimated to be less than its carrying amount, the carrying amount of the asset (or CGU) is reduced to its recoverable amount. An impairment loss is recognized immediately in consolidated net income. Where an impairment loss subsequently reverses, the carrying amount of the asset (or CGU) is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognized for the asset (or CGU) in prior years. A reversal of an impairment loss is recognized immediately in consolidated net income. Impairment losses related to goodwill are not reversible. For the year ended December 31, 2014, the Company recognized impairment of Ps. 3.17 Leases The determination of whether an arrangement is, or contains, a lease is based on the substance of the arrangement at inception date, whether fulfillment of the arrangement is dependent on the use of a specific asset or assets or the arrangement conveys a right to use the asset, even if that right is not explicitly specified in an arrangement. Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. All other leases are classified as operating leases. Assets held under finance leases are initially recognized as assets of the Company at their fair value at the inception of the lease or, if lower, at the present value of the minimum lease payments. The corresponding liability to the lessor is included in the consolidated statement of financial position as a finance lease obligation. Lease payments are apportioned between finance expenses and reduction of the lease obligation so as to achieve a constant rate of interest on the remaining balance of the liability. Interest expenses are recognized immediately in consolidated net income, unless they are directly attributable to qualifying assets, in which case they are capitalized in accordance with the Company’s general policy on borrowing costs. Contingent rentals are recognized as expenses in the periods in which they are incurred. Assets held under finance leases are depreciated over their expected useful lives on the same basis as owned assets or, where shorter, the term of the relevant lease. Operating lease payments are recognized as an expense on a straight-line basis over the lease term, except where another systematic basis is more representative of the time pattern in which economic benefits from the leased asset are consumed. Contingent rentals arising under operating leases are recognized as an expense in the period in which they are incurred. In the event that lease incentives are received to enter into operating leases, such incentives are recognized as a liability. The aggregate benefit of incentives is recognized as a reduction of rental expense on a straight-line basis, except where another systematic basis is more representative of the time pattern in which economic benefits from the leased asset are consumed. Leasehold improvements on operating leases are amortized using the straight-line method over the shorter of either the useful life of the assets or the related lease term. 3.18 Financial liabilities and equity instruments 3.18.1 Classification as debt or equity Debt and equity instruments issued by the Company are classified as either financial liabilities or as equity in accordance with the substance of the contractual arrangements and the definitions of a financial liability and an equity instrument. 3.18.2 Equity instruments An equity instrument is any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities. Equity instruments issued by the Company are recognized at the proceeds received, net of direct issue costs. Repurchase of the Company’s own equity instruments is recognized and deducted directly in equity. No gain or loss is recognized in profit or loss on the purchase, sale, issue or cancellation of the Company’s own equity instruments. 3.18.3 Financial liabilities Initial recognition and measurement Financial liabilities within the scope of IAS 39 are classified as financial liabilities at FVTPL, loans and borrowings, or as derivatives designated as hedging instruments in an effective hedge, as appropriate. The Company determines the classification of its financial liabilities at initial recognition. All financial liabilities are recognized initially at fair value less, in the case of loans and borrowings, directly attributable transaction costs. The Company financial liabilities include trade and other payables, loans and borrowings, and derivative financial instruments, see Note Subsequent measurement The measurement of financial liabilities depends on their classification as described below. 3.18.4 Loans and borrowings After initial recognition, interest bearing loans and borrowings are subsequently measured at amortized cost using the effective interest method. Gains and losses are recognized in the consolidated income statements when the liabilities are derecognized as well as through the effective interest method amortization process. Amortized cost is calculated by taking into account any discount or premium on acquisition and fees or costs that are an integral part of the effective interest method. The effective interest method amortization is included in interest expense in the consolidated income statements, see Note 18. 3.18.5 Derecognition A financial liability is derecognized when the obligation under the liability is discharged or cancelled or expires. When an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as the derecognition of the original liability and the recognition of a new liability. The difference in the respective carrying amounts is recognized in the consolidated income statements. 3.19 Provisions Provisions are recognized The amount recognized as a provision is the best estimate of the consideration required to settle the present obligation at When some or all of the economic benefits required to settle a provision are expected to be recovered from a third party, a receivable is recognized as an asset if it is virtually certain that reimbursement will be received and the amount of the receivable can be measured reliably. The Company Restructuring provisions are recognized only when the recognition criteria for provisions are fulfilled. The Company has a constructive obligation when a detailed formal plan identifies the business or part of the business concerned, the location and number of employees affected, a detailed estimate of the associated costs, and an appropriate timeline. Furthermore, the employees affected must have been notified of the plan’s main features. 3.20 Post-employment and other long-term employee benefits Post-employment and other long-term employee benefits, which are considered to be monetary items, include obligations for pension and retirement plans, seniority premiums and postretirement medical services, are all based on actuarial calculations, using the projected unit credit method. In Mexico, the economic benefits from employee benefits and retirement pensions are granted to employees with 10 years of service and minimum age of 60. In accordance with Mexican Labor Law, the Company provides seniority premium benefits to its employees under certain circumstances. These benefits consist of a one-time payment equivalent to 12 days wages for each year of service (at the employee’s most recent salary, but not to exceed twice the legal minimum wage), payable to all employees with 15 or more years of service, as well as to certain employees terminated involuntarily prior to the vesting of their seniority premium benefit. For qualifying employees, the Company also provides certain post-employment healthcare benefits such as the medical-surgical services, pharmaceuticals and hospital. For defined benefit retirement plans and other long-term employee benefits, such as the Company’s sponsored pension and retirement plans, seniority premiums and postretirement medical service plans, the cost of providing benefits is determined using the projected unit credit method, with actuarial valuations being carried out at the end of each reporting period. All remeasurements of the Company’s defined benefit obligation such as actuarial gains and losses are recognized directly in other comprehensive income (“OCI”). The Company presents service costs within cost of goods sold, administrative and selling expenses in the consolidated income statements. The Company presents net interest cost within interest expense in the consolidated income statements. The projected benefit obligation recognized in the consolidated statement of financial position represents the present value of the defined benefit obligation as of the end of each reporting period. Certain subsidiaries of the Company have established plan assets for the payment of pension benefits, seniority premiums and postretirement medical services through irrevocable trusts of which the employees are named as beneficiaries, which serve to increase the funded status of such plans’ related obligations. Costs related to compensated absences, such as vacations and vacation premiums, are recognized on an accrual basis. Cost for mandatory severance benefits are recorded as incurred. The Company recognizes a liability and expense for termination benefits at the earlier of the following dates:
The Company is demonstrably committed to a termination when, and only when, the entity has a detailed formal plan for the termination and is without realistic possibility of withdrawal. A settlement occurs when an employer enters into a transaction that eliminates all further legal of constructive obligations for part or all of the benefits provided under a defined benefit plan. A curtailment arises from an isolated event such as closing of a plant, discontinuance of an operation or termination or suspension of a plan. Gains or losses on the settlement or curtailment of a defined benefit plan are recognized when the settlement or curtailment occurs. During 2014, the Company settled its pension plan in Brazil and consequently recognized the corresponding effects of the settlement on the results of the current period, refer to Note 16. 3.21 Revenue recognition Sales of products are recognized as revenue upon delivery to the customer, and once all the following conditions are satisfied: The Company has transferred to the buyer the significant risks and rewards of ownership of the goods; The Company retains neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold; The amount of revenue can be measured reliably; It is probable that the economic benefits associated with the transaction will flow to the Company; and The costs incurred or to be incurred in respect of the transaction can be measured reliably. All of the above conditions are typically met at the point in time that goods are delivered to the customer at the customers’ facilities. Net sales reflect units delivered at list prices reduced by promotional allowances, discounts and the amortization of the agreements with customers to obtain the rights to sell and promote the Company’s products. Rendering of services and other Revenue arising from services of sales of waste material and packing of raw materials are recognized in the other operating revenues caption in the consolidated income statement. The Company recognized these transactions as revenues in accordance with the requirements established in the IAS 18 “Revenue” for delivery of goods and rendering of services, which are:
Interest income Revenue arising from the use by others of entity assets yielding interest is recognized once all the following conditions are satisfied: The amount of the revenue can be measured reliably; and It is probable that the economic benefits associated with the transaction will flow to the entity. For all financial instruments measured at amortized cost and interest bearing financial assets classified as available for sale, interest income is recorded using the effective interest rate (“EIR”), which is the rate that exactly discounts the estimated future cash or receipts through the expected life of the financial instrument or a shorter period, where appropriate, to the net carrying amount of the financial asset. The related interest income is included in the consolidated income statements. 3.22 Administrative and selling expenses Administrative expenses include labor costs (salaries and other benefits, including employee profit sharing “PTU”) of employees not directly involved in the sale or production of the Company’s products, as well as professional service fees, the depreciation of office facilities, amortization of capitalized information technology system implementation costs and any other similar costs. Selling expenses include: Distribution: labor costs (salaries and other related benefits), outbound freight costs, warehousing costs of finished products, write off of returnable bottles in the distribution process, depreciation and maintenance of trucks and other distribution facilities and equipment. For the years ended December 31, 2014, 2013 and 2012, these distribution costs amounted to Ps. 19,236, Ps. 17,971 and Ps. 16,839, respectively; Sales: labor costs (salaries and other benefits, including PTU) and sales commissions paid to sales personnel; and Marketing: labor costs (salaries and other benefits), promotional expenses and advertising costs. PTU is paid by the Company’s Mexican and Venezuelan subsidiaries to its eligible employees. In Mexico, employee profit sharing is computed at the rate of 10% of the individual company taxable income, except for considering cumulative dividends received from resident legal persons in Mexico, depreciation of historical rather tax restated values, foreign exchange gains and losses, which are not included until the asset is disposed of or the liability is due and other effects of inflation are also excluded. As of January 1, 2014, PTU in Mexico will be calculated from the same taxable income for income tax, except for the following: a) neither tax losses from prior years nor the PTU paid during the year are deductible; and b) payments exempt from taxes for the employees are fully deductible in the PTU computation. In Venezuela, employee profit sharing is computed at a rate equivalent to 15% of after tax income, and it is no more than four months of salary. 3.23 Income taxes Income tax expense represents the sum of the tax currently payable and deferred tax. Income taxes are charged to consolidated net income as they are incurred, except when they relate to items that are recognized in other comprehensive income or directly in equity, in which case, the current and deferred tax are also recognized in other comprehensive income or directly in equity, respectively. 3.23.1 Current income taxes Income taxes are recorded in the results of the year they are incurred. 3.23.2 Deferred income taxes Deferred tax is recognized on temporary differences between the carrying amounts of assets and liabilities in the consolidated financial statements and the corresponding tax bases used in the computation of taxable profit. Deferred tax liabilities are generally recognized for all taxable temporary differences. Deferred tax assets are generally recognized for all deductible temporary differences to the extent that it is probable that taxable profits will be available against which those deductible temporary differences can be utilized and if any, future benefits from tax loss carry forwards and certain tax credits. Such deferred tax assets and liabilities are not recognized if the temporary difference arises from initial recognition of goodwill (no recognition of deferred tax liabilities) or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the taxable profit nor the accounting profit, except in the case of Brazil, where certain goodwill amounts are at times deductible for tax purposes. Deferred tax liabilities are recognized for taxable temporary differences associated with investments in subsidiaries, associates, and interests in joint ventures, except where the Company is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred tax assets arising from deductible temporary differences associated with such investments and interests are only recognized to the extent that it is probable that there will be sufficient taxable profits against which to utilize the benefits of the temporary differences and they are expected to reverse in the foreseeable future. Deferred income taxes are classified as a long-term asset or liability, regardless of when the temporary differences are expected to reverse. The carrying amount of deferred tax assets is reviewed at the end of each reporting period and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered. Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the period in which the liability is settled or the asset realized, based on tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period. The measurement of deferred tax liabilities and assets reflects the tax consequences that would follow from the manner in which the Company expects, at the end of the reporting period, to recover or settle the carrying amount of its assets and liabilities. In Mexico, the income tax rate is 30% for 2012, 2013 and 2014, and as result of Mexican Tax Reform for 2014, it will remain at 30% for the following years (see Note 24). 3.24 Share-based payments arrangements Senior executives of the Company receive remuneration in the form of share-based payment transactions, whereby employees render services as consideration for equity instruments. The equity instruments are granted and then held by a trust controlled by the Company until vesting. They are accounted for as equity settled transactions. The award of equity instruments is a fixed monetary value on grant date. Equity-settled share-based payments to employees are measured at the fair value of the equity instruments at the grant date. The fair value determined at the grant date of the equity-settled share-based payments is expensed and recognized based on the graded vesting method over the vesting period, based on the Company’s estimate of equity instruments that will eventually vest. At the end of each reporting period, the Company revises its estimate of the number of equity instruments expected to vest. The impact of the revision of the original estimates, if any, is recognized in consolidated net income such that the cumulative expense reflects the revised estimate. 3.25 Earnings per share The Company presents basic and diluted earnings per share (EPS) data for its shares. Basic EPS is calculated by dividing the net income attributable to controlling interest by the weighted average number of shares outstanding during the period adjusted for the weighted average of own shares purchased in the year. Diluted EPS is determined by adjusting the weighted average number of shares outstanding including the weighted average of own shares purchased in the year for the effects of all potentially dilutive securities, which comprise share rights granted to employees described above. 3.26 Issuance of subsidiary stock The Company recognizes
Note 4.1 Mergers and acquisitions
While the acquired companies disclosed below, from note 4.1.1 to note 4.1.4, represent bottlers of Coca-Cola trademarked beverages, such entities were not under common ownership control prior to their acquisition. 4.1.1 Acquisition of Grupo Spaipa On October 29, 2013, Coca-Cola FEMSA through its Brazilian subsidiary Spal Industria Brasileira de Bebidas, S.A. completed the acquisition of 100% of Grupo Spaipa. Grupo Spaipa is comprised of the bottler entity Spaipa, S.A. Industria Brasileira de Bebidas and three Holding Companies (collectively “Spaipa”) and was acquired for Ps. 26,856 in an all cash transaction. Spaipa was a bottler of Coca-Cola trademark products which operated mainly in Sao Paulo and Paraná, Brazil. This acquisition was made to reinforceCoca-Cola FEMSA’s leadership position in Brazil. Transaction related costs of Ps. 8 were expensed by the Company as incurred, and recorded as a component of administrative expenses in the accompanying consolidated income statements. Spaipa was included in operating results from November 2013. The fair value of Grupo Spaipa’s net assets acquired is as follows:
Coca-Cola FEMSA expects to recover the amount recorded as goodwill through synergies related to the available production capacity. Goodwill has been allocated to Coca-Cola FEMSA’s cash generating unit in Brazil. The goodwill recognized and expected to be deductible for income tax purposes according to Brazil tax law, is Ps. 22,202. Selected income statement information of Spaipa for the period from the acquisition date through December 31, 2013 is as follows:
On August 22, 2013, Coca-Cola FEMSA through its Brazilian subsidiary Spal Industria Brasileira de Bebidas, S.A. completed the acquisition of 100% of Companhia Fluminense de Refrigerantes (“Companhia Fluminense”) for Ps. 4,657 in an all cash transaction. Companhia Fluminense was a bottler of Coca-Cola trademark products which operated in the states of Minas Gerais, Rio de Janeiro and Sao Paulo, Brazil. This acquisition was made to reinforce Coca-Cola FEMSA’s The fair value of Companhia Fluminense’s net assets acquired is as follows:
Coca-Cola FEMSA expects to recover the amount recorded as goodwill through synergies related to the available production capacity. Goodwill has been allocated to Coca-Cola FEMSA’s cash generating unit in Brazil. The goodwill recognized and expected to be deductible for income tax purposes according to Brazil tax law is Ps. 4,581. Selected income statement information of Companhia Fluminense for the period from the acquisition date through December 31, 2013 is as follows:
4.1.3 Merger with Grupo On May 24, 2013, Coca-Cola FEMSA completed the merger of 100% of Grupo Yoli. Grupo Yoli comprised the bottler entity YOLI de Acapulco, S.A. de C.V. and other nine entities. Grupo Yoli was a bottler of Coca-Cola trademark products which operated mainly in the state of Guerrero, as well as in parts of the state of Oaxaca in Mexico. This merger was made to reinforce Coca-Cola FEMSA’s leadership position in Mexico. The transaction involved the issuance of 42,377,925 new L shares of Coca-Cola FEMSA, along with a cash payment immediately prior to closing of Ps. 1,109, in exchange for 100% share ownership of Grupo YOLI, which was accomplished through a merger. The total purchase price was Ps. 9,130 based on a share price of Ps. 189.27 per share on May 24, 2013. Transaction related costs of Ps. 82 were expensed by Coca-Cola FEMSA as incurred, and recorded as a component of administrative expenses in the accompanying consolidated income statements. Grupo YOLI was included in operating results from June 2013. The fair value of Grupo Yoli net assets acquired is as follows:
Coca-Cola FEMSA expects to recover the amount recorded as goodwill through synergies related to the available production capacity. Goodwill has been allocated to Coca-Cola FEMSA’s cash generating unit in Mexico. The entire amount of goodwill will not be tax deductible. Selected income statement information of Grupo YOLI for the period from the acquisition date through December 31, 2013 is as follows:
On May 4, 2012, Coca-Cola FEMSA completed the merger of 100% of Grupo
Coca-Cola FEMSA, The fair value of the Grupo
Coca-Cola FEMSA expects to recover the amount recorded as goodwill through synergies related to the available production capacity. Goodwill has been allocated to Coca-Cola FEMSA’s
Unaudited Pro Forma Financial Data The following unaudited consolidated pro forma financial data represent the Company’s historical financial statements, adjusted to give effect to (i) the
Below are
During 2012, gain on sale for shares from the disposal of Note 5. Cash and Cash Equivalents For the purposes of the statement of cash flows, cash includes cash on hand and in banks and cash equivalents, which are short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value, with a maturity date of three months or less at their acquisition date. Cash at the end of the reporting period as shown in the consolidated statement of
As explained in Note 3.3 above, the Company operates in Venezuela, which has a Note 6. Investments As of December 31, 2014 and 2013 investments are classified as held-to maturity, the
For the years ended December 31, 2014, 2013 and 2012, the effect of the investments in the consolidated income statements Note 7. Accounts Receivable, Net
7.1 Trade receivables Accounts receivable representing rights arising from sales and loans to Coca-Cola FEMSA has accounts receivable from The Coca-Cola Company arising from the latter’s participation in The carrying value of Aging of
In determining the recoverability of trade receivables, the Company considers any change in the credit quality of the trade receivable from the date credit was initially granted up to the end of the reporting period. The concentration of credit risk is limited due to the customer base being large and unrelated. Aging of impaired trade receivables (days outstanding)
7.3 Payments from The Coca-Cola Company The Coca-Cola Company participates in certain advertising and promotional programs as well as in the Coca-Cola FEMSA’s refrigeration equipment and returnable bottles investment program. Contributions received by Coca-Cola FEMSA for advertising and promotional incentives are recognized as a reduction in selling expenses and contributions received for the refrigeration equipment and returnable bottles investment program are recorded as a reduction in the investment in refrigeration equipment and returnable bottles items. For the years ended December 31, 2014, 2013 and 2012 contributions received were Ps. 4,118, Ps. 4,206 and Ps. 3,018, respectively. Note
For the years ended at 2014, 2013 and 2012, the Company recognized write-downs of its inventories for Ps. 1,028, Ps. 1,322 and Ps. 793 to net realizable value, respectively. For the years ended at 2014, 2013 and 2012, changes in inventories are comprised as follows and included in the consolidated income statement under the cost of goods sold caption:
Note 9.1 Other current assets
Prepaid expenses as of December 31,
The Company has pledged part of its short-term deposits in order to fulfill the collateral requirements for the accounts payable in different currencies. As of December 31, 2014 and 2013, the fair value of the short-term deposit pledged were:
Note 10. Investments in Associates and Joint Ventures Details of the Company’s associates and joint ventures accounted for under the equity method at the end of the reporting period are as follows:
As mentioned in Note
During 2014 Coca-Cola
During 2014 and 2013 Coca-Cola FEMSA made
During 2014 Coca-Cola FEMSA On January 25, 2013, Coca-Cola FEMSA finalized the acquisition of 51% of CCFPI for From the date of the investment acquisition through December 31, 2014, the results of CCFPI have been recognized by Coca-Cola FEMSA using the equity method, this is based on the following factors: (i) during the initial four-year period some relevant activities require joint approval between Coca-Cola FEMSA and The Coca-Cola Company; and (ii) potential voting rights to acquire the remaining 49% of CCFPI are not probable to be executed in the foreseeable future due to the fact that the call option is “out of the money” as of December 31, 2014 and 2013. On February 23, 2012, a wholly-owned subsidiary of Mitsubishi Corporation, and Stichting Depositary PGGM Infrastructure Funds, a pension fund managed by PGGM, acquired the 45% interest held by FEMSA in the parent companies of the Mareña Renovables Wind Power Farm. The sale of FEMSA’s participation as an investor resulted in a On April 30, 2010, the Company acquired an economic interest of 20% of Heineken Group. Heineken’s main activities are the production, distribution and marketing of beer worldwide. The Company recognized an equity income of Ps.
Reconciliation from the equity of the associate Heineken to the investment of the Company.
As of December 31, During the years ended December 31, Summarized financial information in respect of the interests in individually immaterial of Coca-Cola FEMSA’s associates accounted for under the equity method is set out below.
Summarized financial information in respect of the interests in individually immaterial of Coca-Cola FEMSA’s joint ventures accounted for under the equity method is set out below.
The Company’s share of other comprehensive income from equity investees, net of taxes for the year ended December 31, 2014, 2013 and 2012 are as follows:
Note
Cost Cost as of January 1, 2011 Additions and acquired in business combination Transfer of completed projects in progress Transfer to/(from) assets classified as held for sale Disposals Effects of changes in foreign exchange rates Changes in value on the recognition of inflation effects Capitalization of comprehensive financing result Cost as of December 31, 2011
Carrying Amount As of January 1, 2010 As of December 31, 2010 As of December 31, 2011
During the years ended December 31, For the years ended December 31,
Note
Cost Cost as of January 1, 2012 Purchases Acquisition from business combinations Capitalization of internally developed systems Adjustments of fair value of past business combinations Transfer of completed development systems Disposals Effect of movements in exchange rates Changes in value on the recognition of inflation effects Capitalization of borrowing costs Balance as of December 31, 2012 Cost as of January 1, 2013 Purchases Acquisition from business combinations Transfer of completed development systems Disposals Effect of movements in exchange rates Changes in value on the recognition of inflation effects Capitalization of borrowing costs Cost as of December 31, 2013
Cost Cost as of January 1, 2014 Purchases Change in fair value of past acquisitions Transfer of completed development systems Disposals Effect of movements in exchange rates Changes in value on the recognition of inflation effects Capitalization of borrowing costs Cost as of December 31, 2014 Amortization and Amortization as of January 1, 2012 Amortization expense Disposals Effect of movements in exchange rates Amortization as of December 31, 2012 Amortization as of January 1, 2013 Amortization expense Disposals Effect of movements in exchange rates Amortization as of December 31, 2013 Amortization and Amortization as of January 1, 2014 Amortization expense Impairment losses Disposals Effect of movements in exchange rates Amortization as of December 31, 2014 Carrying Amount As of December 31, 2012 As of December 31, 2013 As of December 31, 2014
During the years ended December 31, For the years ended 2014, 2013 and
Coca-Cola FEMSA Impairment Tests for Cash-Generating Units Containing Goodwill and Distribution Rights For the purpose of impairment testing, goodwill and distribution rights are allocated and monitored on an individual country basis, which is considered to be the CGU. The aggregate carrying amounts of goodwill and distribution rights allocated to each CGU are as follows:
Goodwill and distribution rights are tested for impairments annually. The recoverable amounts of the CGUs are based on value-in-use calculations. Value in use was determined by discounting the future cash flows generated from the continuing use of the CGU. The foregoing forecasts could differ from the results obtained over time; however, Coca-Cola FEMSA prepares its estimates based on the current situation of each of the CGUs. The recoverable amounts are based on value in use. The value in use of CGUs is determined based on the method of discounted cash flows. The key assumptions used in projecting cash flows are: volume, expected annual long-term inflation, and the weighted average cost of capital (“WACC”) used to discount the projected flows. To determine the discount rate, Coca-Cola FEMSA uses the WACC as determined for each of the cash generating units in real terms and as described in following paragraphs. The estimated discount rates to perform the IAS 36 “Impairment of assets”, impairment test for each CGU consider market participants’ assumptions. Market participants were selected taking into consideration the size, operations and characteristics of the business that are similar to those of Coca-Cola FEMSA. The discount rates represent the current market assessment of the risks specific to each CGU, taking into consideration the time value of money and individual risks of the underlying assets that have not been incorporated in the cash flow estimates. The discount rate calculation is based on the specific circumstances of Coca-Cola FEMSA and its operating segments and is derived from its WACC. The WACC takes into account both debt and equity. The cost of equity is derived from the expected return on investment by Company’s investors. The cost of debt is based on the interest bearing borrowings Coca-Cola FEMSA is obliged to service. Segment-specific risk is incorporated by applying individual beta factors. The beta factors are evaluated annually based on publicly available market data. Market participant assumptions are important because, not only do they include industry data for growth rates, management also assesses how the CGU’s position, relative to its competitors, might change over the forecasted period. The key assumptions used for the value-in-use calculations are as follows: Cash flows were projected based on actual operating results and the five-year business plan. Cash flows for a further five-year were forecasted maintaining the same stable growth and margins per country of the last year base. Coca-Cola FEMSA believes that this forecasted period is justified due to the non-current nature of the business and past experiences. Cash flows after the first ten-year period were extrapolated using a perpetual growth rate equal to the expected annual population growth, in order to calculate the terminal recoverable amount. A per CGU-specific Weighted Average Cost of Capital (“WACC”) was applied as a hurdle rate to discount cash flows to get the recoverable amount of the units; the calculation assumes, size premium adjusting. The key assumptions by CGU for impairment test as of December 31, 2014 were as follows:
The key assumptions by CGU for impairment test as of December 31, 2013 were as follows:
The values assigned to the key assumptions represent management’s assessment of future trends in the industry and are based on both external sources and internal sources (historical data). Coca-Cola FEMSA consistently applied its methodology to determine CGU specific WACC’s to perform its annual impairment testing. Sensitivity to Changes in Assumptions At December 31, 2014 Coca-Cola FEMSA performed an additional impairment sensitivity calculation, taking into account an adverse change in post-tax WACC, according to the country risk premium, using for each country the relative standard deviation between equity and sovereign bonds and an additional sensitivity to the volume of 100 basis points, except for Costa Rica and concluded that no impairment would be recorded.
Note 13. Other Assets, Net and Other Financial Assets 13.1 Other assets, net
13.2 Other financial assets
As of December 31, 2014 and 2013, the fair value of long term accounts receivable amounted to Ps. 69 and Ps. 1,142, respectively. The fair value is calculated based on the discounted value of contractual cash flows whereby the discount rate is estimated using rates currently offered for receivable of similar amounts and maturities, which is considered to be level 2 in the fair value hierarchy. Note 14. Balances and Transactions with Related Parties and Affiliated Companies Balances and transactions
The consolidated
Transactions Income: Services and others to Heineken Group Logistic services to Grupo Industrial Saltillo, S.A. de C.V. Sales of Grupo Inmobiliario San Agustín, S.A. shares to Instituto Tecnológico y de Estudios Superiores de Monterrey, A.C. Other revenues from related parties Expenses: Purchase of concentrate from The Coca-Cola Company(1) Purchases of raw material, beer and operating expenses from Heineken Group(1) (2) Purchase of baked goods and snacks from Grupo Bimbo, S.A.B. de C.V.(2) Purchase of cigarettes from British American Tobacco Mexico(2) Advertisement expense paid to The Coca-Cola Company(1) Purchase of juices from Jugos del Valle, S.A.P.I. de C.V.(1) (2) Interest expense and fees paid to BBVA Bancomer, S.A. de C.V. Purchase of sugar from Beta San Miguel(1) Purchase of sugar, cans and aluminum lids from Promotora Mexicana de Embotelladores, S.A. de C.V.(1) Purchase of canned products from IEQSA(1) Purchases from affiliated companies of Grupo Tampico(1) Advertising paid to Grupo Televisa, S.A.B. Interest expense paid to Grupo Financiero Banamex, S.A. de C.V. Insurance premiums for policies with Grupo Nacional Provincial, S.A.B. Donations to Instituto Tecnológico y de Estudios Superiores de Monterrey, A.C. Purchase of plastic bottles from Embotelladora del Atlántico, S.A. (formerly Complejo Industrial Pet, S.A.) (1) Purchase of juice and milk powder from Grupo Estrella Azul(1) Donations to Difusión y Fomento Cultural, A.C. Interest expense paid to The Coca-Cola Company(1) Other expenses with related parties Balances due from related parties are considered to be recoverable. Accordingly, for the years ended December 31, 2014 and 2013, there was no expense resulting from the uncollectibility of balances due from related parties.
Also as disclosed in Note 10, during January 2013, Coca-Cola FEMSA purchased its 51% interest in CCFPI from The Coca-Cola Company. The remainder of CCFPI is owned by The Coca-Cola Company and Coca-Cola FEMSA has currently outstanding certain call and put options related to CCFPI’s equity interests. Commitments with related parties
The benefits and aggregate compensation paid to executive officers and senior management of
Short-term employee benefits paid Postemployment benefits Termination benefits Share based payments Note
Transactions For the year ended U.S. dollars Euros Other currencies Total For the year ended U.S. dollars Euros Other currencies Total For the year ended U.S. dollars Euros Other currencies Total Mexican peso exchange rates effective at the dates of
Note The Company has various labor liabilities for employee benefits in connection with pension, seniority During 2014, Coca-Cola FEMSA settled its pension plan in Brazil and consequently Coca-Cola FEMSA recognized the corresponding effects of the settlement as disclosed below. 16.1 Assumptions The Company annually evaluates the reasonableness of the assumptions used in its labor Actuarial calculations for pension and retirement plans, seniority premiums
Measurement date December:
Measurement date December:
Venezuela is a hyper-inflationary economy. The actuarial calculations for post-employment benefit (termination indemnity), as well as the associated cost for the period, were determined using the following long-term assumptions which are “real” assumptions (excluding inflation):
Measurement date December:
In order to valuate the plan and the effects of the
In Mexico upon retirement, the Based on these assumptions, the amounts of benefits expected
16.3 Trust assets Trust assets consist of fixed and variable return financial instruments recorded at market
In Mexico, the regulatory framework for pension plans is established in the Income Tax Law and its Regulations, the Federal Labor Law and the Mexican Social Security Institute Law. None of these laws establish minimum funding levels or a minimum required level of contributions. At December 31, 2013, in Brazil, the regulatory framework for pension plans is established by the Brazilian Social Security Institute (INSS), which indicates that the contributions must be made by the Company and the workers. There are not minimum funding requirements of contributions in Brazil neither contractual nor given. In Venezuela, the regulatory framework for post-employment benefits is established by the Organic Labor Law for Workers (LOTTT). The organic nature of this law means that its purpose is to defend constitutional rights, and therefore has precedence over other laws. In Mexico, the Income Tax Law requires that, in the case of private plans, certain notifications must be submitted to the authorities and a certain level of instruments must be invested in Federal Government securities among others. The Company’s various pension plans have a technical committee that is responsible for verifying the correct operation of the plan with regard to the payment of benefits, actuarial valuations of the plan, and supervise the trustee. The committee is responsible for determining the investment portfolio and the types of instruments the fund will be invested in. This technical committee is also responsible for reviewing the correct operation of the plans in all of the countries in which the Company has these benefits. The risks related to the Company’s employee benefit plans are primarily attributable to the plan assets. The Company’s plan assets are invested in a diversified portfolio, which considers the term of the plan so as to invest in assets whose expected return coincides with the estimated future payments. Since the Mexican Tax Law limits the plan asset investment to 10% for related parties, this risk is not considered to be significant for purposes of the Company’s Mexican subsidiaries. In Mexico, the Company’s policy
On May 7, 2012, the President of Venezuela amended the Organic Law for Workers (LOTTT), which establishes a minimum level of social welfare benefits to which workers have a right when their labor relationship ends for whatever reason. This benefit is computed based on the last salary received by the worker and retroactive to June 19, 1997 for any employee who joined the Company prior to that date. For employees who joined the Company after June 19, 1997, the benefit is computed based on the date on which the employee joined the Company. An actuarial computation must be performed using the projected unit credit method to determine the amount of the labor obligations that arise. As a result of the initial calculation, there was an amount for Ps. 381 included in the other expenses caption in the consolidated income statement reflecting past service costs during the year ended December 31, 2012 (See Note 19). In Mexico, the amounts and types of securities of the Company in related parties included in portfolio fund are as follows:
At December 31, 2013, in Brazil, the amounts and types of securities of the Company in related parties included in plan assets are as follows:
16.4 Amounts recognized in the consolidated income statements and the consolidated statement of comprehensive income
Postretirement Medical Services: Labor cost Interest cost Expected return on trust assets Labor cost of past services(1) Amortization of net actuarial loss Curtailment Severance Indemnities: Labor cost Interest cost Labor cost of past services(1) Amortization of net actuarial loss
Remeasurements of the net defined benefit liability include the following:
The return on plan assets, excluding amounts included in interest expense. Severance Indemnities: Initial balance Labor cost Interest cost Curtailment Actuarial loss Benefits paid Acquisitions Ending balance
Actuarial gains and losses arising from changes in demographic assumptions.
Actuarial gains and losses arising from changes in financial assumptions.
Changes in the effect of limiting a net defined benefit asset to the asset ceiling, excluding amounts included in interest expense. 16.5 Changes in the balance of the defined benefit obligation for post-employment
16.6 Changes in the balance of plan assets
As a result of the Company’s investments in life annuities plan, management does not expect it will need to make material contributions to plan assets in order to meet its future obligations. 16.7 Variation in assumptions The Discount rate: The rate that determines the value of the obligations over time. Salary increase rate: The rate that considers the salary increase which implies an increase in the benefit payable. Healthcare cost increase rate: The rate that considers the trends of health care costs which implies an impact The following table presents the amount of defined benefit plan expense and OCI impact in
16.8 Employee benefits expense For the years ended December 31, 2014, 2013 and 2012, employee benefits expenses recognized in the consolidated income statements are as follows:
Note 17.1 Quantitative and qualitative objectives The bonus program for executives is based on complying with certain goals established annually by management, which include quantitative and qualitative objectives, and special projects. The quantitative objectives represent approximately 50% of the bonus, and are based on the Economic Value Added (“EVA”) methodology. The objective established for the executives at each entity is based on a combination of the EVA generated per entity and the EVA generated by the Company, calculated at approximately 70% and 30%, respectively. The qualitative objectives and special projects represent the remaining 50% of the annual bonus and are based on the critical success factors established at the beginning of the year for each executive.
17.2 Share-based payment bonus plan The Company has implemented a stock incentive plan for the benefit of its senior executives. As discussed above, this plan uses as its main evaluation metric the Economic Value Added, or EVA. Under the EVA stock incentive plan, eligible employees are entitled to receive a special annual bonus (fixed amount), to be paid in shares of FEMSA or Coca-Cola FEMSA, as applicable or stock options (the plan considers providing stock options to employees; however, since inception only shares of FEMSA or Coca-Cola FEMSA have been granted). The plan is managed by FEMSA’s chief executive officer (CEO), with the support of the board of directors, together with the CEO of the respective sub-holding company. FEMSA’s Board of Directors is responsible for approving the plan’s structure, and the annual amount of the bonus. Each year, FEMSA’s CEO in conjunction with the Evaluation and Compensation Committee of the board of directors and the CEO of the respective sub-holding company determine the employees eligible to participate in the plan and the bonus formula to determine the number of shares to be received, which vest ratably over a six year period. On such date, the Company The Company contributes the individual employee’s special bonus (after taxes) in cash to
changes in equity, on the line issuance (repurchase) of shares associated with share-based payment plans. Should an employee leave prior to their shares vesting, they would lose the rights to such shares, which would then remain within the Administrative Trust and be able to be reallocated to other eligible employees as determined by the Company. The incentive plan target is expressed in months of salary, and the final amount payable is computed based on a percentage of compliance with the goals established every year. All shares held in As of December 31,
The fair value of the shares held by the trust as of the end of December 31, Note
Derivative Financial Instruments(1) Cross currency swaps: Units of investments to Mexican pesos and variable rate: Interest pay rate Interest receive rate Interest rate swap:(2) Mexican pesos Variable to fixed rate: Interest pay rate Interest receive rate Variable rate debt: U.S. dollars Bank loans Interest rate Mexican pesos Domestic senior notes Interest rate Bank loans Interest rate Argentine pesos Bank loans Interest rate Brazilian reais Bank loans Interest rate Finance leases Interest rate Colombian pesos Bank loans Interest rate Subtotal Total long-term debt Current portion of long term debt
Hedging Derivative Financial Instruments (1) Cross currency swaps: Units of investments to Mexican pesos and variable rate: Fixed to variable(2) Interest pay rate Interest receive rate U.S. dollars to Mexican pesos: Fixed to variable(3) Interest pay rate Interest receive rate Variable to fixed Interest pay rate Interest receive rate Fixed to fixed Interest pay rate Interest receive rate U.S. dollars to Brazilian reais: Fixed to variable Interest pay rate Interest receive rate Variable to variable Interest pay rate Interest receive rate Interest rate swap: Mexican pesos Variable to fixed rate(2): Interest pay rate Interest receive rate Variable to fixed rate(3): Interest pay rate Interest receive rate
For the years ended December 31, 2014, 2013 and 2012, the interest expense is comprised as follows:
On May 7, 2013, the Company issued long-term debt on the NYSE in the amount of $1,000, which was made up of senior notes of $300 with a maturity of 10 years and a fixed interest rate of 2.875%; and senior notes of $700 with a maturity of 30 years and a fixed interest rate of 4.375%. After the issuance, the Company contracted cross-currency swaps to reduce its exposure to risk of exchange rate and interest rate fluctuations associated with this issuance, see Note 20. In November, 2013, Coca-Cola FEMSA issued U.S.$1,000 in aggregate principal amount of 2.375% Senior Notes due 2018, U.S.$750 in aggregate principal amount of 3.875% Senior Notes due 2023 and U.S.$400 in aggregate principal amount of 5.250% Senior Notes due 2043, in an SEC registered offering. These notes are guaranteed by its subsidiaries: Propimex, S. de R.L. de C.V., Comercializadora La Pureza de Bebidas, S. de R.L. de C.V., Controladora Interamericana de Bebidas, S. de R.L. de C.V., Grupo Embotellador Cimsa, S. de R.L. de C.V., Refrescos Victoria del Centro, S. de R.L. de C.V., Servicios Integrados Inmuebles del Golfo, S. de R.L. de C.V. and Yoli de Acapulco, S.A. de C.V. (“Guarantors”). On December 4, 2007, the Company obtained the approval from the National Banking and Securities Commission (Comisión Nacional Bancaria y de Valores or “CNBV”) for the issuance of long-term domestic senior notes (“Certificados Bursátiles”) in the amount of Ps. 10,000 (nominal amount) or its equivalent in investment units. As of December 31,
During 2013, Coca-Cola FEMSA contracted and prepaid in part the following Bank loans denominated in dollars: i) $500 (nominal amount) with a maturity date in 2016 and variable interest rate and prepaid $380 (nominal amount) in November 2013, the outstanding amount of this loan is $120 (nominal amount) and ii) $1,500 (nominal amount) with a maturity date in 2018 and variable interest rate and prepaid $1,170 (nominal amount) in November 2013, the outstanding amount of this loan is $330 (nominal amount). In December 2013, Coca-Cola FEMSA prepaid in full outstanding Bank loans denominated in dollars for a total amount of $600 (nominal amount). The Company has financing from different institutions under agreements that stipulate different restrictions and covenants, which mainly consist of maximum levels of leverage and capitalization as well as minimum consolidated net worth and debt and interest coverage ratios. As of the date of these consolidated financial statements, the Company was in compliance with all restrictions and covenants contained in its financing agreements. In January 13, 2014, Coca-Cola FEMSA issued an additional U.S. $350 million of Senior Notes comprised of 10 year and 30 year bonds. The interest rates and maturity dates of the new notes are the same as those of the initial 2013 notes offering. These notes are also guaranteed by the same Guarantors. In February 2014, Coca-Cola FEMSA prepaid in full outstanding Bank loans denominated in pesos for a total amount of Ps. 4,175 (nominal amount). Note
Note Fair Value of Financial Instruments
The Company measures the fair value of its financial assets and liabilities classified as level 2 applying the income approach method, which estimates the fair value based on expected cash flows discounted to net present value. The following table summarizes the Company’s financial assets and liabilities measured at fair value, as of December 31,
Derivative financial instrument (current asset) Derivative financial instrument (non-current asset) Derivative financial instrument (current liability) Derivative financial instrument (non-current liability) 20.1 Total debt The fair value of
20.2 Interest rate swaps The Company uses interest rate swaps to offset the interest rate risk associated with its borrowings, pursuant to which it pays amounts based on a fixed rate and receives amounts based on a floating rate. These instruments have been designated as cash flow hedges and are recognized in the consolidated At December 31,
The net effect of expired contracts The Company These instruments have been designated as cash flow hedges and are recognized in the consolidated
At December 31, 2014, the
At December 31, 2013, the Company had the following outstanding forward agreements to purchase foreign currency:
20.4 Options to purchase foreign currency The Company has entered into a collar strategy to reduce its exposure to the risk of exchange rate fluctuations. A collar is a strategy that limits the exposure to the risk of exchange rate fluctuations in a similar way as a forward agreement. These instruments have been designated as cash flow hedges and are recognized in the consolidated At December 31, 2014, the Company had the following outstanding collars agreements to purchase foreign currency:
At December 31, 2013, the Company had no outstanding collars to purchase foreign currency (composed of a call and a put option with different strike levels with the same notional amount and maturity). 20.5 Cross-currency swaps The Company These instruments are recognized in the consolidated
At December 31, 2014, the Company had the following outstanding cross currency swap agreements:
At December 31, 2013, the Company had the following outstanding cross currency swap agreements:
20.6 Commodity price contracts The Company The fair value of expired commodity price At December 31, 2014, Coca-Cola FEMSA had the following sugar price contracts:
At December 31, 2014, Coca-Cola FEMSA had the following aluminum price contracts:
At December 31, 2013, Coca-Cola FEMSA had the following outstanding sugar price contracts:
At December 31, 2013, Coca-Cola FEMSA had the following aluminum price contracts:
20.7 Financial Instruments for CCFPI acquisition: The The Level 3 fair value of the Company’s put option related to its 51% ownership interest approximates zero as its exercise price as defined in the contract adjusts proportionately to the underlying fair value of CCFPI. 20.8 Net effects of expired contracts
20.9 Net effect of changes in
20.10 Net effect of expired contracts that did not meet the hedging criteria for accounting purposes
20.11 Market risk Market risk is The Company’s activities expose it primarily to the financial risks of changes in foreign currency exchange rates and commodity prices. The Company enters into a variety of derivative financial instruments to manage its exposure to foreign currency risk, and commodity prices risk including: Forward Agreements to Purchase Foreign Currency in order to reduce its exposure to the risk of exchange rate fluctuations. Cross-Currency Swaps in order to reduce its exposure to the risk of exchange rate fluctuations. Commodity price contracts in order to reduce its exposure to the risk of fluctuation in the The Company tracks the fair value The following disclosures provide a sensitivity analysis of the market risks management considered to be reasonably possible at the end of the reporting period, which the Company is exposed to as it relates to foreign exchange rates and commodity prices, which it considers in its existing hedging strategy:
20.12 Interest rate risk Interest rate risk is the risk that the fair value or future cash flow of a financial instrument will fluctuate because of changes in market interest rates. The Company is exposed to interest rate risk because it and its subsidiaries borrow funds at both fixed and variable interest rates. The risk is managed by the Company by maintaining an appropriate mix between fixed and variable rate borrowings, and by the use of the different derivative financial instruments. Hedging activities are evaluated regularly to align with interest rate views and defined risk appetite, ensuring the most cost-effective hedging strategies are applied. The following disclosures provide a sensitivity analysis of the interest rate risks management considered to be reasonably possible at the end of the reporting period, which the Company is exposed to as it relates to its fixed and floating rate borrowings, which it considers in its existing hedging strategy:
20.13 Liquidity risk Each of the Company’s sub-holding companies generally finances its operational and capital requirements on an independent basis. As of December 31, 2014 and 2013, 80.66% and 79.48%, respectively of the Company’s outstanding consolidated total indebtedness was at the level of its sub-holding companies. This structure is attributable, in part, to the inclusion of third parties in the capital structure of Coca-Cola FEMSA. Currently, the Company’s management expects to continue to finance its operations and capital requirements primarily at the level of its sub-holding companies. Nonetheless, they may decide to incur indebtedness at its holding company in the future to finance the operations and capital requirements of the Company’s subsidiaries or significant acquisitions, investments or capital expenditures. As a holding company, the Company depends on dividends and other distributions from its subsidiaries to service the Company’s indebtedness. The Company’s principal source of liquidity has generally been cash generated from its operations. The Company has traditionally been able to rely on cash generated from operations because a significant majority of the sales of Coca-Cola FEMSA and FEMSA Comercio are on a cash or short-term credit basis, and FEMSA Comercio’s OXXO stores are able to finance a significant portion of their initial and ongoing inventories with supplier credit. The Company’s principal use of cash has generally been for capital expenditure programs, acquisitions, debt repayment and dividend payments. Ultimate responsibility for liquidity risk management rests with the Company’s board of directors, which has established an appropriate liquidity risk management framework for the management of the Company’s short-, medium- and long-term funding and liquidity requirements. The Company manages liquidity risk by maintaining adequate reserves and credit facilities, by continuously monitoring forecast and actual cash flows, and with a low concentration of maturities per year. The Company has access to credit from national and international bank institutions in order to meet treasury needs; besides, the Company has the highest rating for Mexican companies (AAA) given by independent rating agencies, allowing the Company to evaluate capital markets in case it needs resources. As part of the Company’s financing policy, management expects to continue financing its liquidity needs with cash from operations. Nonetheless, as a result of regulations in certain countries in which the Company operates, it may not be beneficial or, as in the case of exchange controls in Venezuela, practicable to remit cash generated in local operations to fund cash requirements in other countries. Exchange controls like those in Venezuela may also increase the real price of remitting cash from operations to fund debt requirements in other countries. In the event that cash from operations in these countries is not sufficient to fund future working capital requirements and capital expenditures, management may decide, or be required, to fund cash requirements in these countries through local borrowings rather than remitting funds another country. In addition, the Company’s liquidity in Venezuela could be affected by changes in the rules applicable to exchange rates as well as other regulations, such as exchange controls. In the future the Company management may finance its working capital and capital expenditure needs with short-term or other borrowings. The Company’s management continuously evaluates opportunities to pursue acquisitions or engage in joint ventures or other transactions. We would expect to finance any significant future transactions with a combination of cash from operations, long-term indebtedness and capital stock. The Company’s sub-holding companies generally incur short-term indebtedness in the event that they are temporarily unable to finance operations or meet any capital requirements with cash from operations. A significant decline in the business of any of the Company’s sub-holding companies may affect the sub-holding company’s ability to fund its capital requirements. A significant and prolonged deterioration in the economies in which we operate or in the Company’s businesses may affect the Company’s ability to obtain short-term and long-term credit or to refinance existing indebtedness on terms satisfactory to the Company’s management. The Company presents the maturity dates associated with its long-term financial liabilities as of December 31, 2014, see Note 18. The Company generally makes payments associated with its long-term financial liabilities with cash generated from its operations. The following table reflects all contractually fixed pay-offs for settlement, repayments and interest resulting from recognized financial liabilities. It includes expected net cash outflows from derivative financial liabilities that are in place as of December 31, 2014. Such expected net cash outflows are determined based on each particular settlement date of an instrument. The amounts disclosed are undiscounted net cash outflows for the respective upcoming fiscal years, based on the earliest date on which the Company could be required to pay. Cash outflows for financial liabilities (including interest) without fixed amount or timing are based on economic conditions (like interest rates and foreign exchange rates) existing at December 31, 2014.
The Company generally makes payments associated with its non-current financial liabilities with cash generated from its operations. 20.14 Credit risk Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in financial loss to the Company. The Company has adopted a policy of only dealing with creditworthy counterparties, where appropriate, as a means of mitigating the risk of financial loss from defaults. The Company only transacts with entities that are rated the equivalent of investment grade and above. This information is supplied by independent rating agencies where available and, if not available, the Company uses other publicly available financial information and its own trading records to rate its major customers. The Company’s exposure and the credit ratings of its counterparties are continuously monitored and the aggregate value of transactions concluded is spread amongst approved counterparties. Credit exposure is controlled by counterparty limits that are reviewed and approved by the risk management committee. The Company has a high receivable turnover; hence management believes credit risk is minimal due to the nature of its businesses, which have a large portion of their sales settled in cash. The Company’s maximum exposure to credit risk for the components of the statement of financial position at 31 December 2014 and 2013 is the carrying amounts (see Note 7). The credit risk on liquid funds and derivative financial instruments is limited because the counterparties are banks with high credit-ratings assigned by international credit-rating agencies. The Company manages the credit risk related to its derivative portfolio by only entering into transactions with reputable and credit-worthy counterparties as well as by maintaining in some cases a Credit Support Annex (CSA) that establishes margin requirements, which could change upon changes to the credit ratings given to the Company by independent rating agencies. As of December 31, 2014, the Company concluded that the maximum exposure to credit risk related with derivative financial instruments is not significant given the high credit rating of its counterparties. Note An analysis of FEMSA’s non-controlling interest in its consolidated subsidiaries for the years ended December 31,
The changes in the FEMSA’s non-controlling interest were as follows:
Non controlling cumulative other comprehensive income is comprised as follows:
Coca-Cola FEMSA shareholders, especially the Coca-Cola Company which hold Series D shares, have some protective rights about investing in or disposing of significant businesses. However, these rights do not limit the continued normal operations of Coca-Cola FEMSA. Summarized financial information in respect of Coca-Cola FEMSA is set out below.
Note 22.1 Equity accounts The capital stock of FEMSA is comprised of 2,161,177,770 BD units and 1,417,048,500 B units. As of December 31, The characteristics of the common shares are as follows:
Series “B” shares, with unlimited voting rights, which at all times must represent a minimum of 51% of total capital stock;
Series “L” shares, with limited voting rights, which may represent up to 25% of total capital stock; and
Series “D” shares, with limited voting rights, which individually or jointly with series “L” shares may represent up to 49% of total capital stock. The Series “D” shares are comprised as follows:
Subseries “D-L” shares may represent up to 25% of the series “D” shares;
Subseries “D-B” shares may comprise the remainder of outstanding series “D” shares; and
The non-cumulative premium dividend to be paid to series “D” The Series “B” and “D” shares are linked together in related units as follows:
“B units” each of which represents five series “B” shares and which are traded on the BMV; and
“BD units” each of which represents one series “B” share, two subseries “D-B” shares and two subseries “D-L” shares, and which are traded both on the BMV and the As of December 31,
The net income of the Company is subject to the legal requirement that 5% thereof be transferred to a legal reserve until such reserve equals 20% of capital stock at nominal value. This reserve may not be distributed to Retained earnings and other reserves distributed as dividends, as well as the effects derived from capital reductions, are subject to income tax at the rate in effect at the date of distribution, except Dividends paid in excess of CUFIN are subject to income tax at a grossed-up rate based on the current statutory rate. Since 2003, this tax may be credited against the income tax of the year in which the dividends are paid, and in the following two years against the income tax and estimated tax payments. In addition, the new LISR sets forth that entities that distribute dividends to its stockholders who are individuals and foreign residents must withhold 10% thereof for ISR purposes, which will be paid in Mexico. The foregoing will not be applicable when distributed dividends arise from the accumulated CUFIN balance as of December 31, 2013. At At an ordinary At an ordinary shareholders’ meeting of Coca-Cola FEMSA held on March
For the years ended December 31,
For the years ended December 31, 2014 and 2013 the dividends declared and paid per share by the Company are as follows:
22.2 Capital management The Company manages its capital to ensure that its subsidiaries will be able to continue as going concerns while maximizing the return to shareholders through the optimization of its debt and equity balance in order to obtain the lowest cost of capital available. The Company manages its capital structure and makes adjustments to it in light of changes in economic conditions. To maintain or adjust the capital structure, the Company may adjust the dividend payment to shareholders, return capital to shareholders or issue new shares. No changes were made in the objectives, policies or processes for managing capital during the years ended December 31, 2014 and 2013. The Company is not subject to any externally imposed capital requirements, other than the legal reserve (see Note 22.1) and debt covenants (see Note 18). The Company’s finance committee reviews the capital structure of the Company on a quarterly basis. As part of this review, the committee considers the cost of capital and the risks associated with each class of capital. In conjunction with this objective, the Company seeks to maintain the highest credit rating both nationally and internationally and is currently rated AAA in Mexico and BBB+ in the United States, which requires it to have a debt to earnings before interest, taxes, depreciation and amortization (“EBITDA”) ratio lower than 2. As a result, prior to entering into new business ventures, acquisitions or divestures, management evaluates the optimal ratio of debt to EBITDA in order to maintain its credit rating. Note
Diluted earnings per share amounts are calculated by dividing consolidated net income
Net Controlling Interest Income Shares expressed in millions: Weighted average number of shares for basic earnings per share Effect of dilution associated with nonvested shares for share based payment plans Weighted average number of shares adjusted for the effect of dilution Note 24. Income Taxes In December of 2013, the Mexican government enacted a package of tax reforms (the “2014 Tax Reform”) which includes several significant changes to tax laws, discussed in further detail below, entering into effect on January 1, 2014. The following changes are expected to most significantly impact the Company’s financial position and results of operations: The introduction of a new withholding tax at the rate of 10% for dividends and/or distributions of earnings generated in 2014 and beyond; A fee of one Mexican peso per liter on the sale and import of flavored beverages with added sugar, and an excise tax of 8% on food with caloric content equal to, or greater than 275 kilocalories per 100 grams of product; The prior 11% value added tax (VAT) rate that applied to transaction in the border region was raised to 16%, matching the general VAT rate applicable in the rest of Mexico; The elimination of the tax on cash deposits (IDE) and the Deductions on exempt payroll items for workers are limited to 53%; The income tax rate in 2013 was 30%. Scheduled decreases to the income tax rate that would have reduced the rate to 29% in 2014 and 28% in 2015 and thereafter, were canceled in connection with the 2014 Tax Reform; The repeal of
The introduction of an new optional tax integration regime (a modified form of tax consolidation), which replaces the previous tax consolidation regime. The new optional tax integration regime requires an equity ownership of at least 80% for qualifying subsidiaries and would allow the Company to defer the annual tax payment of its profitable participating subsidiaries for a period equivalent to 3 years to the extent their individual tax expense exceeds the integrated tax expense of the Company. The impacts of the 2014 Tax Reform on the Company’s financial position and results of operations as of and for the year ended December 31, 2013, resulted from the repeal of the tax consolidation regime as described above regarding the payable of Ps. 180 and the effects of the changes in tax rates on deferred tax assets and liabilities as disclosed below, which On November 18, 2014, the Venezuelan government published two decrees which are effective as of the date of publication. This reform establishes that segregated loss carryforward (i.e. foreign operating or domestic operating) may be used only against future income of the same type. Additionally the three year carryforward for net operating losses is maintained, but the amount of losses available for carryforwards may 24.1 Income Tax
The
Recognized in Consolidated Statement of Other Comprehensive Income (OCI)
A reconciliation between tax expense and income before income taxes and share of the profit or loss of associates and joint ventures accounted for using the equity method multiplied by the Mexican domestic tax rate for the years ended December 31, 2014, 2013 and 2012 is as follows:
Deferred Income Tax Related to:
Deferred tax related to Other Comprehensive Income (OCI)
The changes in the balance of the net deferred income tax asset are as follows:
The Company offsets tax assets and liabilities if and only if it has a legally enforceable right to set off current tax assets and current tax liabilities and the deferred tax assets and deferred tax liabilities related to income taxes are levied by the same tax authority. Tax Loss Carryforwards The subsidiaries in Mexico and Brazil have tax loss carryforwards. The tax effect net of consolidation benefits and their years of expiration are as follows:
During 2013 Coca-Cola FEMSA completed certain acquisitions in Brazil as disclosed in Note 4. In connection with those acquisition Coca-Cola FEMSA recorded certain goodwill balances that are deductible for Brazilian income tax reporting purposes. The deduction of such goodwill amortization has resulted in the creation of NOLs in Brazil. NOLs in Brazil have no expiration, but their usage is limited to 30% of Brazilian taxable income in any given year. As of December 31, 2014 Coca-Cola FEMSA believes that it is more likely than not that it will ultimately recover such NOLs through the reversal of temporary differences and future taxable income. Accordingly no valuation allowance has been provided. The changes in the balance of tax loss carryforwards are as follows:
There were no withholding taxes associated with the payment of dividends in either 2014, 2013 or 2012 by the Company The Company has determined that undistributed profits of its subsidiaries, joint ventures or associates will not be distributed in the foreseeable future. The temporary differences associated with investments in subsidiaries, associates and joint ventures, for which a deferred tax
The operations in Guatemala, Nicaragua, Colombia and Argentina are subject to a
Note 25.1 Other current financial liabilities
The carrying value of short-term payables approximates its fair value as of December 31, 2014 and 2013. 25.2 Provisions and other long term liabilities
25.4 Provisions recorded in the consolidated statement of financial position
The Company has various loss contingencies, and has recorded reserves
25.5 Changes in the 25.5.1 Indirect taxes
During 2014, Coca-Cola FEMSA took advantage of a Brazilian tax amnesty program. The settlement of certain outstanding matters under that amnesty program generated a benefit Ps. 455 which is reflected in other income during the year ended December 31, 2014 (see Note 19). 25.5.2 Labor
A roll forward for legal contingencies is not disclosed because the amounts are not considered to be material. While provision for all claims has already been made, the actual outcome of the disputes and the timing of the resolution cannot be estimated by the Company at this time. 25.6 Unsettled lawsuits The Company has entered into probable but more than remote of being settled against the Company. However, the Company believes that the ultimate resolution of such Included in this amount Coca-Cola FEMSA has tax contingencies, amounting to approximately Ps. 21,217, with loss expectations assessed by management and supported by the analysis of legal counsel which it considers possible. Among these possible contingencies, are Ps. 8,625 in various tax disputes related primarily to credits for ICMS (VAT) and Industrialized Products Tax (IPI). Possible claims also include Ps. 10,194 related to the disallowance of IPI credits on the acquisition of inputs from the Manaus Free Trade Zone. Cases related to these matters are pending final decision at the administrative level. Possible claims also include Ps. 1,817 related to compensation of federal taxes not approved by the IRS (Tax authorities). Cases related to these matters are pending final decision in the administrative and judicial spheres. Finally, possible claims include Ps. 538 related to the requirement by the Tax Authorities of State of São Paulo for ICMS (VAT), interest and penalty due to the alleged underpayment of tax arrears for the period 1994-1996. Coca-Cola FEMSA is defending its position in these matters and final decision is pending in court. In addition, the Company has Ps. 5,162 in unsettled indirect tax contingencies regarding indemnification accorded with Heineken over FEMSA Cerveza. These matters are related to different Brazilian federal taxes which are pending final decision. At December 31, 2014 there are not important labor and legal contingencies that we have to disclose. In recent years in its Mexican 25.7 Collateralized contingencies As is customary in Brazil, the Company has been 25.8 Commitments As of December 31, The contractual maturities of the operating lease commitments by currency, expressed in Mexican pesos as of December 31,
Rental expense charged to Future minimum lease payments under finance leases with the present value of the net minimum lease payments are as follows:
The Company through its subsidiary Coca-Cola FEMSA has firm commitments for the purchase of property, plant and equipment of Ps. 2,077 as December 31, 2014. 25.9 Reestructuring provision Coca-Cola FEMSA recorded a restructuring provision. This provision relates principally to reorganization in the structure of the Company. The restructuring plan was drawn up and announced to the employees of the Company in 2014 when the provision was recognized in its consolidated financial statements. The restructuring of the Company is expected to complete by 2015 and it is presented in current liabilities within accounts payable caption in the consolidated statement of financial position.
Note The analytical information by segment is presented considering the Company’s business units (Subholding Companies as defined in Note 1), which is consistent with the internal reporting presented to the Chief Operating Decision Maker. A segment is a component of the Company Inter-segment transfers or transactions are entered into and presented under accounting policies of each segment, which are the same to a) By Business Unit:
Cash flows from operations before changes in working capital and provisions(4) Investment in associates and joint ventures Long-term assets Total assets Disposals of long-lived assets Capital expenditures, net(5) Net cash flows provided by (used in) operating activities Net cash flows (used in) provided by investment activities Net cash flows (used in) provided by financing activities 2014 Total revenues Intercompany revenue Gross profit Administrative expenses Selling expenses Other income Other expenses Interest expense Interest income Other net finance expenses(3) Income before income taxes and share of the profit of associates and joint ventures accounted for using the equity method Income taxes Share of the profit of associates and joint ventures accounted for using the equity method, net of taxes Consolidated net income Depreciation and amortization(2) Non-cash items other than depreciation and amortization Investments in associates and joint ventures Total assets Total liabilities Investments in fixed assets(4)
2009 Total revenues Intercompany revenue Income from operations Other expenses, net Interest expense Interest income Other net finance expenses(2) Equity method from associates Income taxes Consolidated net income before discontinued operations Depreciation(3) Amortization and non-cash operating expenses Cash flows from operations before changes in working capital and provisions(4) Disposals of long-lived assets Capital expenditures, net(5) Net cash flows provided by operating activities Net cash flows (used in) provided by investment activities Net cash flows used in financing activities 2012 Total revenues Intercompany revenue Gross profit Administrative expenses Selling expenses Other income Other expenses Interest expense Interest income Other net finance expenses(3) Income before income taxes and share of the profit of associates and joint ventures accounted for using the equity method Income taxes Share of the profit of associates and joint ventures accounted for using the equity method, net of taxes Consolidated net income Depreciation and amortization(2) Non-cash items other than depreciation and amortization Investments in associates and joint ventures Total assets Total liabilities Investments in fixed assets(4)
The Company
Geographic disclosure for the Company is
Note
The Company
IFRS 9,Financial Instruments In July 2014, the
IFRS 15,Revenue from Contracts with Customers IFRS 15, “Revenue from Contracts with Customers”, was issued in May 2014 and applies to annual reporting periods beginning on or after January 1, 2017, earlier application is permitted. Revenue is recognized as control is passed, either over time or at a point in time. The standard outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry specific guidance. In Amendments to IAS 16 and IAS 38,Clarification of Acceptable Methods of Depreciation and Amortization The amendments clarify the principle in IAS 16 and IAS 38 that revenue reflects a pattern of economic benefits that are generated from operating a business (of which the
Changes in the Balance of Deferred Income Taxes Initial liability (asset) balance Provision for the year Change in the statutory income tax rate Deferred tax of the exchange of FEMSA Cerveza Control acquisition of Coca-Cola FEMSA and fair value adjustments Application of tax loss carryforwards due to amnesty adoption Reversal of tax loss carryforwards allowance Acquisition of subsidiaries Reversal of tax loss carryforwards Financial instruments Cumulative translation adjustment Unrecognized labor liabilities Others Ending liability (asset) balance
Consolidated Cash Flows Cash flows from operating activities: Net income Adjustments to reconcile net income to net cash provided by (used in) operating activities: Inflation effect Depreciation Amortization Equity method of associates Deferred income taxes Other adjustments regarding operating activities Profit regarding Coca-Cola FEMSA (see Note 27 A) Income from the exchange of FEMSA Cerveza (see Note 27 B) Changes in operating assets and liabilities net of business acquisitions: Working capital investment Dividends received from Coca-Cola FEMSA (Recoverable) payable taxes, net Interest payable Labor obligations Derivative financial instruments Net cash flows provided by operating activities Cash flows from investing activities: Long-lived assets sale Acquisition of property, plant and equipment Purchase of investments Proceeds from investments Other assets acquisitions Recovery of long-term financial receivables with FEMSA Cerveza Net effect of FEMSA Cerveza exchange Cash incorporated from Coca-Cola FEMSA Other disposals Payment of debt for the acquisition of Grupo Tampico, net of cash acquired (Note 5A) Payment of debt for the acquisition of Grupo CIMSA, net of cash acquired (Note 5A) Net cash flows (used in) provided by investing activities Cash flows from financing activities: Bank loans obtained Bank loans paid Dividends declared and paid Restricted cash activity for the year Other financing activities Net cash flows (used in) provided by financing activities Effect of exchange rate changes on cash and cash equivalents Cash and cash equivalents: Net (decrease) increase Initial cash Ending balance Supplemental cash flow information: Interest paid Income taxes paid
Amendments to IFRS The amendments to IFRS 11 require that a joint operator accounting for the acquisition of an interest in The amendments apply to both the acquisition of
Note 28. Subsequent Events On February 11, 2015, the Venezuelan government announced plans for a new foreign currency exchange system with three markets. The new legislation, maintains the official exchange rate of
More generally, future currency devaluations or the imposition of exchange controls in any of the countries in which the Company operates may potentially increase its operating costs, which could have an adverse effect on its financial position, results of operations and comprehensive income. On December 2014, FEMSA Comercio agreed to acquire 100% of Farmacias Farmacon, a regional drugstore operator in the Since 1995, FEMSA Comercio has been providing services and assets for the operation of gasoline service stations through agreements with third parties that own Petroleos Mexicanos (PEMEX) franchises, using the therefore from owning PEMEX franchises given FEMSA’s foreign institutional investor base. In light of recent changes to the legal framework as part of Mexico’s energy reform, FEMSA Comercio is no longer precluded from owning PEMEX franchises and participating in the retail of gasoline. In order to enable this, FEMSA Comercio has agreed to acquire On February
Report of Independent Registered Public Accounting Firm To: The Executive and Supervisory Board of Heineken N.V. We have audited the accompanying consolidated statements of financial position of Heineken N.V. and subsidiaries as of December 31, We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Heineken N.V. and subsidiaries as of December 31,
/s/ KPMG Amsterdam, the Netherlands February Financial statements
Consolidated Statement of Comprehensive Income
Consolidated Statement of Financial Position
Consolidated Statement of Cash Flows
Consolidated Statement of Changes in Equity
Consolidated Statement of Changes in Equity continued
Consolidated Statement of Changes in Equity continued
1. Reporting entity
HEINEKEN is primarily involved in the brewing and selling of beer. 2. Basis of preparation
The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) as endorsed by the EU and also comply with the financial reporting requirements included in Part 9 of Book 2 of the Dutch Civil Code. All standards and interpretations issued by the International Accounting Standards Board (IASB) and the International Financial Reporting Interpretations Committee (IFRIC) effective year-end The consolidated financial statements have been prepared by the Executive Board of the Company and authorised for issue on
The consolidated financial statements have been prepared on the historical cost basis
The methods used to measure fair values are discussed further in
These consolidated financial statements are presented in
The preparation of consolidated financial statements in conformity with IFRSs requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets and liabilities, income and expenses. Actual results may differ from these estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimates are revised and in any future periods affected. In particular, information about assumptions and estimation uncertainties and critical judgements in applying accounting policies that have the most significant effect on the amounts recognised in the consolidated financial statements are described in the following notes: Note 6 Acquisitions and disposals of subsidiaries and non-controlling interests Note 15 Intangible assets Note 16 Investments in associates and joint ventures Note 17 Other investments and receivables Note 18 Deferred tax assets and liabilities Note 28 Employee benefits
Note 30 Provisions Note 32 Financial risk management and financial instruments Note 34
Offsetting Financial Assets and Financial Liabilities (amendments to IAS 32) Recoverable Amount Disclosures for Non-Financial Assets (amendments to IAS 36) Novation of Derivatives and Continuation of Hedge Accounting (amendments to IAS 39) IFRIC 21 Levies Offsetting Financial Assets and Financial liabilities (amendments to IAS 32) The amendments to IAS 32 clarify the offsetting rules for financial assets and financial liabilities on the statement of financial position. The clarifications of the offsetting principle in IAS 32 did not result in any changes to the financial assets and liabilities compared with the practice adopted before these amendments. Recoverable Amount Disclosures for Non-Financial Assets (amendments to IAS 36) HEINEKEN will comply with the extended disclosure requirements on the recoverable amount of non-financial assets, when applicable. Novation of Derivatives and Continuation of Hedge Accounting (amendments to IAS 39) As the result of this amendment, HEINEKEN has changed its accounting policy
IFRIC 21 Levies IFRIC 21, Levies, clarifies that a levy is not recognised until the obligating event specified in the legislation occurs, even if there is no realistic opportunity to avoid the obligation. HEINEKEN has reassessed the timing of when to accrue levies imposed by legislation and 3. Significant accounting policies General The accounting policies set out below have been applied consistently to all periods presented in these consolidated financial statements and have been applied consistently by HEINEKEN entities.
Business combinations are accounted for using the acquisition method as at the acquisition date, which is the date on which control is transferred to
The consideration transferred does not Costs related to the acquisition, other than those associated with the issue of debt or equity securities, that Any contingent consideration payable is recognised at fair value at the acquisition date. If the contingent consideration is classified as equity, it is not remeasured and settlement is accounted for within equity. Otherwise, subsequent changes to the fair value of the contingent considerations are recognised in profit or loss.
Acquisitions of non-controlling interests are accounted for as transactions with owners in their capacity as owners and therefore no goodwill is recognised as a result. Adjustments to non-controlling interests arising from transactions that do not involve the loss of control are based on a proportionate amount of the net assets of the subsidiary. 3. Significant accounting policies continued
Subsidiaries are entities controlled by HEINEKEN.
Upon the loss of control, HEINEKEN derecognises the assets and liabilities of the subsidiary, any non-controlling interests and the other components of equity related to the subsidiary. Any
HEINEKEN’s investments in associates and joint ventures are accounted for using the equity method of accounting. Investments in associates are those entities in which HEINEKEN has significant influence, but Investments in associates and joint ventures The consolidated financial statements include HEINEKEN’s share of the profit or loss and other comprehensive income, after adjustments to align the accounting policies with those of HEINEKEN, from the date that significant influence or joint control commences until the date that significant influence or joint control ceases. When HEINEKEN’s share of losses exceeds the carrying amount of the associate or joint venture, including any long-term investments, the carrying amount is reduced to nil and recognition of further losses is discontinued except to the extent that HEINEKEN has an obligation or has made a payment on behalf of the associate or joint venture.
Intra-HEINEKEN balances and transactions, and any unrealised gains and losses or income and expenses arising from intra-HEINEKEN transactions, are eliminated in preparing the consolidated financial statements. Unrealised gains arising from transactions with equity-accounted associates and JVs are eliminated against the investment to the extent of HEINEKEN’s interest in the investee. Unrealised losses are eliminated in the same way as unrealised gains, but only to the extent that there is no evidence of impairment.
Transactions in foreign currencies are translated to the respective functional currencies of HEINEKEN entities at the exchange rates at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the reporting date are retranslated to the functional currency at the exchange rate at that date. The foreign currency gain or loss arising on monetary items is the difference between amortised cost in the functional currency at the beginning of the period, adjusted for effective interest and payments during the period, and the amortised cost in foreign currency translated at the exchange rate at the end of the reporting period. Non-monetary assets and liabilities denominated in foreign currencies that are measured at fair value are retranslated to the functional currency at the exchange rate at the date that the fair value was determined. Non-monetary items in a foreign currency that are measured Foreign currency differences arising on retranslation are recognised in profit or loss, except for differences arising on the retranslation of available-for-sale (equity) investments and foreign currency differences arising on the retranslation of a financial liability designated as a hedge of a net investment, which are recognised in other comprehensive income.
The assets and liabilities of foreign operations, including goodwill and fair value adjustments arising on acquisition, are translated to Foreign currency differences are recognised in other comprehensive income and are presented within equity in the translation reserve. However, if the operation is not a 3. Significant accounting policies continued is reattributed to non-controlling interests. When HEINEKEN disposes of only part of its investment in an associate or joint venture that includes a foreign operation while retaining significant influence or joint control, the relevant proportion of the cumulative amount is reclassified to profit or loss. Foreign exchange gains and losses arising from a monetary item receivable from or payable to a foreign operation, the settlement of which is neither planned nor likely in the foreseeable future, are considered to form part of a net investment in a foreign operation and are recognised in other comprehensive income, and are presented within equity in the translation reserve. The following exchange rates, for the most important countries in which HEINEKEN has operations, were used while preparing these consolidated financial statements:
When the economy of a country in which we operate is deemed hyperinflationary and the functional currency of a Group entity is the currency of that hyperinflationary economy, the financial statements of such Group entities are adjusted so that they are stated in terms of the measuring unit current at the end of the reporting period. This involves restatement of income and expenses to reflect changes in the general price index from the start of the reporting period and restatement of non-monetary items in the balance sheet, such as P, P & E, to reflect current purchasing power as at the period end using a general price index from the date when they were first recognised. Comparative amounts are not adjusted. Any differences arising were recorded in equity on adoption. In 2013 and 2012, hyperinflation accounting was applicable to our operations in Belarus. No hyperinflation accounting was applied in 2014.
Foreign currency differences arising on the
Non-derivative financial instruments comprise investments in equity and debt securities, trade and other receivables, cash and cash equivalents, loans and borrowings, and trade and other payables. Non-derivative financial instruments are recognised initially at fair value plus, for instruments not at fair value through profit or loss, any directly attributable transaction costs. Subsequent to initial recognition, non-derivative financial instruments are measured as described If HEINEKEN has a legal right to offset financial assets with financial liabilities and if HEINEKEN intends either to settle on a net basis or to realise the asset and settle the liability simultaneously, Cash and cash equivalents comprise cash balances and call deposits. Bank overdrafts form an integral part of HEINEKEN’s cash management and are included as a component of cash and cash equivalents for the purpose of the statement of cash flows. Accounting policies for interest income, interest expenses and other net finance income and expenses are discussed in note
If HEINEKEN has the positive intent and ability to hold debt securities to maturity, they are classified as held-to-maturity. Debt securities are loans and long-term receivables and are measured at amortised cost using the effective interest method, less any impairment losses. Investments held-to-maturity are recognised or derecognised on the day they are transferred to or by HEINEKEN.
HEINEKEN’s investments in equity securities and certain debt securities are classified as available-for-sale. Subsequent to initial recognition, they are measured at fair value and changes therein – other than impairment losses (see note 3i(i)) Where these investments are interest-bearing, interest calculated using the effective interest method is recognised in
Other non-derivative financial instruments are measured at amortised cost using the effective interest method, less any impairment losses. Included in non-derivative financial instruments are advances to customers. Subsequently, the advances are amortised over the term of the contract as a reduction of revenue.
HEINEKEN uses derivatives in the ordinary course of business in order to manage market risks. Generally, HEINEKEN seeks to apply hedge accounting in order to minimise the effects of foreign currency, interest rate or commodity price fluctuations in profit or loss. Derivatives that can be used are interest rate swaps, forward rate agreements, caps and floors, commodity swaps, spot and forward exchange contracts and options. Transactions are entered into with a limited number of counterparties with strong credit ratings. Foreign currency, interest rate and commodity hedging operations are governed by internal policies and rules approved and monitored by the Executive Board. Derivative financial instruments are recognised initially at fair value, with attributable transaction costs recognised in profit or loss as incurred. Derivatives for which hedge accounting is not applied are accounted for as instruments at fair value through profit or loss. When derivatives qualify for hedge accounting, subsequent measurement is at fair value, and changes therein accounted for as described in 3b(iv), 3d(ii)
Changes in the fair value of the derivative hedging instrument designated as a cash flow hedge are recognised in other comprehensive income and presented in the hedging reserve within equity to the extent that the hedge is effective. To the extent that the hedge is ineffective, changes in fair value are recognised in profit or loss. If the hedging instrument no longer meets the criteria for hedge accounting, expires or is sold, terminated or exercised,
Changes in the fair value of a derivative hedging instrument designated as a fair value hedge are recognised in profit or loss. The hedged item also is stated at fair value in respect of the risk being hedged; the gain or loss attributable to the hedged risk is recognised in profit or loss and adjusts the carrying amount of the hedged item. If the hedge no longer meets the criteria for hedge accounting, the adjustment to the carrying amount of a hedged item for which the effective interest method is used is amortised to profit or loss over the period to maturity.
Embedded derivatives are separated from the host contract and accounted for separately if the economic characteristics and risks of the host contract and the embedded derivative are not closely related, a separate instrument with the same terms as the embedded derivative would meet the definition of a derivative, and the combined instrument is not measured at fair value through profit or loss. Changes in the fair value of separable embedded derivatives are recognised immediately in profit or loss.
Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of ordinary shares are recognised as a deduction from equity, net of any tax effects. 3. Significant accounting policies continued
When share capital recognised as equity is repurchased, the amount of the consideration paid, which includes directly attributable costs, is net of any tax effects recognised as a deduction from equity. Repurchased shares are classified as treasury shares and are presented in the reserve for own shares. When treasury shares are sold or reissued subsequently, the amount received is recognised as an increase
Dividends are recognised as a liability in the period in which they are declared.
Items of Cost comprises the initial purchase price increased with expenditures that are directly attributable to the acquisition of the asset Spare parts that are acquired as part of an equipment purchase and only to be used in connection with this specific equipment Returnable bottles and kegs in circulation are recorded within P, P & E and a corresponding liability is recorded in respect of the obligation to repay the customers’ deposits. Deposits paid by customers for returnable items are reflected in the consolidated statement of financial position within current liabilities.
Leases in terms of which HEINEKEN assumes substantially all the risks and rewards of ownership are classified as finance leases. Upon initial recognition, P, P & E acquired by way of finance lease is measured at an amount equal to the lower of its fair value and the present value of the minimum lease payments at inception of the lease. Lease payments are apportioned between the outstanding liability and finance charges so as to achieve a constant periodic rate of interest on the remaining balance of the liability. Other leases are operating leases and are not recognised in HEINEKEN’s statement of financial position. Payments made under operating leases are charged to profit or loss on a straight-line basis over the term of the lease. When an operating lease is terminated before the lease period has expired, any payment required to be made to the lessor by way of penalty is recognised as an expense in the period in which termination takes place.
The cost of replacing a part of an item of P, P & E is recognised in the carrying amount of the item or recognised as a separate asset, as appropriate, if it is probable that the future economic benefits embodied within the part will flow to HEINEKEN and its cost can be measured reliably. The carrying amount of the replaced part is derecognised. The costs of the day-to-day servicing of P, P & E are recognised in profit or loss when incurred.
Depreciation is calculated over the depreciable amount, which is the cost of an asset, or other amount substituted for cost, less its residual value. Land except for financial leases on land over the contractual period is not depreciated as it is deemed to have an infinite life. Depreciation on other P, P & E is charged to profit or loss on a straight-line basis over the estimated useful lives of items of P, P & E, and major components that are accounted for separately, since this most closely reflects the expected pattern of consumption of the future economic benefits embodied in the asset. Assets under construction are not depreciated. Leased assets are depreciated over the shorter of the lease term and their useful lives unless it is
Where parts of an item of P, P & E have different useful lives, they are accounted for as separate items of P, P & E. The depreciation methods and residual value as well as the useful lives are reassessed, and adjusted if appropriate, at each financial year-end.
Net gains on sale of items of P, P & E are presented in profit or loss as other income. Net losses on sale are included in depreciation. Net gains and losses are recognised in profit or loss when the significant risks and rewards of ownership have been transferred to the buyer, recovery of the consideration is probable, the associated costs can be estimated reliably, and there is no continuing management involvement with the P, P & E. 3. Significant accounting policies continued
Goodwill arises on the acquisition of subsidiaries, associates and joint ventures and represents the excess of the cost of the acquisition over HEINEKEN’s interest in net fair value of the net identifiable assets, liabilities and contingent liabilities of the acquiree. Goodwill on acquisitions of subsidiaries is included in ‘intangible assets’. Goodwill arising on the acquisition of associates and joint ventures is included in the carrying amount of the
Goodwill is measured at cost less accumulated impairment losses (refer to accounting policy 3i(ii)). Goodwill is allocated to individual or groups of cash-generating units (CGUs) for the purpose of impairment testing and is tested annually for impairment. Negative goodwill is recognised directly in profit or loss as other income.
Brands acquired, separately or as part of a business combination, are capitalised if they meet the definition of an intangible asset and the recognition criteria are satisfied.
Strategic brands are well-known international/local brands with a strong market position and an established brand name. Strategic brands are amortised on an individual basis over the estimated useful life of the brand. Other brands are amortised on a portfolio basis per country.
Customer-related and contract-based intangibles are capitalised if they meet the definition of an intangible asset and the recognition criteria are satisfied. If the amounts are not material, these are included in the brand valuation. The relationship between brands and customer-related intangibles is carefully considered so that brands and customer-related intangibles are not both recognised on the basis of the same cash flows. Reacquired rights are identifiable intangible assets recognised in an acquisition that represent the right an acquirer previously has granted to the acquiree to use one or more of the acquirer’s recognised or unrecognised assets. Customer-related and contract-based intangibles acquired as part of a business combination are valued at fair value. Customer-related and contract-based intangibles acquired separately are measured at cost. Customer-related,
Purchased software is measured at cost less accumulated amortisation (refer to (vi)) and impairment losses (refer to accounting policy 3i(ii)). Expenditure on internally developed software is capitalised when the expenditure qualifies as development activities, otherwise it is recognised in profit or loss when incurred. Expenditure on research activities, undertaken with the prospect of gaining new technical knowledge and understanding, is recognised in profit or loss when incurred. Development activities involve a plan or design for the production of new or substantially improved products, software and processes. Development expenditure is capitalised only if development costs can be measured reliably, the product or process is technically and commercially feasible, future economic benefits are probable, and HEINEKEN intends to and has sufficient resources to complete development and to use or sell the asset. The expenditure capitalised includes the cost of materials, direct labour and overhead costs that are directly attributable to preparing the asset for its intended use, and capitalised borrowing costs. Other development expenditure is recognised in profit or loss when incurred. Capitalised development expenditure is measured at cost less accumulated amortisation (refer to (vi)) and accumulated impairment losses (refer to accounting policy 3i(ii)). Other intangible assets that are acquired by HEINEKEN and have finite useful lives are measured at cost less accumulated amortisation (refer to (vi)) and impairment losses (refer to accounting policy 3i(ii)). Expenditure on internally generated goodwill and brands is recognised in profit or loss when incurred.
Subsequent expenditure is capitalised only when it increases the future economic benefits embodied in the specific asset to which it relates. All other expenditure is expensed when incurred. 3. Significant accounting policies continued
Amortisation is calculated over the cost of the asset, or other amount substituted for cost, less its residual value. Intangible assets with a finite life are amortised on a straight-line basis over their estimated useful lives, other than goodwill, from the date they are available for use, since this most closely reflects the expected pattern of consumption of the future economic benefits embodied in the asset. The estimated useful lives are as follows:
Amortisation methods, useful lives and residual values are reviewed at each reporting date and adjusted if appropriate.
Net gains on sale of intangible assets are presented in profit or loss as other income. Net losses on sale are included in amortisation. Net gains and losses are recognised in profit or loss when the significant risks and rewards of ownership have been transferred to the buyer, recovery of the consideration is probable, the associated costs can be estimated reliably, and there is no continuing management involvement with the intangible assets.
Inventories are measured at the lower of cost and net realisable value. The cost of inventories is based on the weighted average cost formula, and includes expenditure incurred in acquiring the inventories, production or conversion costs and other costs incurred in bringing them to their existing location and condition. Net realisable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling expenses.
Finished products and work in progress are measured at manufacturing cost based on weighted averages and takes into account the production stage reached. Costs include an appropriate share of direct production overheads based on normal operating capacity.
The cost of other inventories is based on weighted averages. Spare parts are valued at the lower of cost and net realisable value. Value reductions and usage of parts are charged to profit or loss. Spare parts that are acquired as part of an equipment purchase and only to be used in connection with this specific equipment are initially capitalised and depreciated as part of the equipment.
A financial asset is assessed at each reporting date to determine whether there is any objective evidence that it is impaired. A financial asset is considered to be impaired if objective evidence indicates that one or more events have had a negative effect on the estimated future cash flows of that asset that can be estimated reliably. Evidence of impairment may include indications that the debtors or a group of debtors are experiencing significant financial difficulty, default or delinquency in interest or principal payments, the probability that they will enter bankruptcy or other financial reorganisation, and where observable data indicates that there is a measurable decrease in the estimated future cash flows, such as changes in arrears or economic conditions that correlate with defaults. An impairment loss in respect of a financial asset measured at amortised cost is calculated as the difference between its carrying amount and the present value of the estimated future cash flows discounted at the original effective interest rate. An impairment loss in respect of an available-for-sale financial asset is calculated by reference to its current fair value. Individually significant financial assets are tested for impairment on an individual basis. The remaining financial assets are assessed collectively in groups that share similar credit risk characteristics. All impairment losses are recognised in profit or loss. Any cumulative loss in respect of an available-for-sale financial asset recognised previously in other comprehensive income and presented in the fair value reserve in equity is transferred to profit or loss. An impairment loss is reversed if the reversal can be related objectively to an event occurring after the impairment loss was recognised. For financial assets measured at amortised cost and available-for-sale financial assets that are debt securities, the reversal is recognised in profit or loss. For available-for-sale financial assets that are equity securities, the reversal is recognised in other comprehensive income.
The carrying amounts of HEINEKEN’s non-financial assets, other than inventories (refer to accounting policy (h)) and deferred tax assets (refer to accounting 3. Significant accounting policies continued For the purpose of impairment testing, assets that cannot be tested individually are grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or groups of assets (the cash-generating unit, ‘CGU’). The recoverable amount of an asset or CGU is the higher of an asset’s fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset or CGU. For the purpose of impairment testing,
An impairment loss is recognised in profit or loss if the carrying amount of an asset or its CGU exceeds its recoverable amount. Goodwill that forms part of the carrying amount of an investment in an associate and joint venture is not recognised separately, and therefore is not tested for impairment separately. Instead, the entire amount of the investment in an associate and joint venture is tested for impairment as a single asset when there is objective evidence that the investment in an associate may be impaired.
Non-current assets, or disposal groups comprising assets and liabilities, that are expected to be recovered primarily through sale rather than through continuing use are classified as held for sale. Immediately before classification as held for sale, the assets, or components of a disposal group, are measured at the lower of their carrying amount and fair value less cost to sell. Any impairment loss on a disposal group is first allocated to goodwill, and then to remaining assets and liabilities on a pro rata basis, except that no loss is allocated to inventories, financial assets, deferred tax assets and employee defined benefit plan assets, which continue to be measured in accordance with HEINEKEN’s accounting policies. Impairment losses on initial classification as held for sale and subsequent gains or losses on remeasurement are recognised in profit or loss. Gains are not recognised in excess of any cumulative impairment loss. Intangible assets and P, P & E once classified as held for sale are not amortised or depreciated. In addition, equity accounting of equity-accounted investees ceases once classified as held for
A defined contribution plan is a post-employment benefit plan (pension plan) under which Obligations for contributions to defined contribution pension plans are recognised as an employee benefit expense in profit or loss in the periods during which services are rendered by employees. Prepaid contributions are recognised as an asset to the extent that a cash refund or a reduction in future payments is available. Contributions to a defined contribution plan that are due more than 12 months after the end of the period in which the employee renders the service are discounted to their present value.
A defined benefit plan is a post-employment benefit plan (pension plan) that is not a defined contribution plan. Typically, defined benefit plans define an amount of pension benefit that an employee will receive on retirement, usually dependent on one or more factors such as age, years of service and compensation. HEINEKEN’s net obligation in respect of defined benefit pension plans is calculated separately for each plan by estimating the amount of future benefit that employees have earned in return for their service in the current and prior periods; that benefit is discounted to determine its present value. The calculations are performed annually by qualified actuaries using the projected unit credit method. When the calculation results in a benefit to HEINEKEN, the recognised asset is limited to the 3. Significant accounting policies continued When the benefits of a plan are HEINEKEN recognises all actuarial gains and losses arising from defined benefit plans immediately in other comprehensive income and all expenses related to defined benefit plans in personnel expenses and other net finance income and expenses in profit or loss.
HEINEKEN’s net obligation in respect of long-term employee benefits, other than pension plans, is the amount of future benefit that employees have earned in return for their service in the current and prior periods; that benefit is discounted to determine its present value, and the fair value of any related assets is deducted. The discount rate is the yield at balance sheet date on high-quality credit-rated bonds that have maturity dates approximating to the terms of HEINEKEN’s obligations. The obligation is calculated using the projected unit credit method. Any actuarial gains and losses are recognised in other comprehensive income in the period in which they arise.
Termination benefits are payable when employment is terminated by Termination benefits are recognised as an expense when HEINEKEN is demonstrably committed to either terminating the employment of current employees according to a detailed formal plan without possibility of withdrawal, or providing termination benefits as a result of an offer made to encourage voluntary redundancy. Termination benefits for voluntary redundancies are recognised if HEINEKEN has made an offer encouraging voluntary redundancy, it is probable that the offer will be accepted, and the number of acceptances can be estimated reliably. Benefits falling due more than 12 months after the balance sheet date are discounted to their present value.
As from 1 January 2005, HEINEKEN established a share plan for the Executive Board and, as from 1 January 2006, HEINEKEN also established a share plan for senior management The grant date fair value, adjusted for expected dividends, of the share rights granted is recognised as personnel expenses with a corresponding increase in equity (equity-settled) At each balance sheet date, HEINEKEN revises its estimates of the number of share rights that are expected to vest, for the 100 per cent internal performance conditions of the running share
As from 21 April 2011, HEINEKEN established a matching share entitlement for the Executive Board. The grant date fair value of the matching shares is recognised as personnel expenses in the income statement as it is deemed an
Short-term employee benefit obligations are measured on an undiscounted basis and are expensed as the related service is provided. A liability is recognised for the amount expected to be paid under short-term benefits if
A provision is recognised if, as a result of a past event, HEINEKEN has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are measured at the present value of the expenditures
A provision for restructuring is recognised when HEINEKEN has approved a detailed and formal restructuring plan, and the restructuring has either commenced or has been announced publicly. Future operating losses are not provided for. The provision includes the benefit commitments in connection with early retirement and redundancy schemes.
A provision for onerous contracts is recognised when the expected benefits to be derived by HEINEKEN from a contract are lower than the unavoidable cost of meeting its obligations under the contract. The provision is measured at the present value of the lower of the expected cost of terminating the contract and the expected net cost of continuing with the 3. Significant accounting policies continued
The other provisions, not being provisions for restructuring or onerous contracts, consist mainly of surety and guarantees, litigation and claims and environmental provisions.
Loans and borrowings are recognised initially at fair value, net of transaction costs incurred. Loans and borrowings are subsequently stated at amortised cost; any difference between the proceeds (net of transaction costs) and the redemption value is recognised in profit or loss over the period of the borrowings using the effective interest method. Loans and borrowings included in a fair value hedge are stated at fair value in respect of the risk being hedged. Loans and borrowings for which
Revenue from the sale of products in the ordinary course of business is measured at the fair value of the consideration received or receivable, net of sales tax, excise duties, returns, customer discounts and other sales-related discounts. Revenue from the sale of products is recognised in profit or loss when the amount of revenue can be measured reliably, the significant risks and rewards of ownership have been transferred to the buyer, recovery of the consideration is probable, the associated costs and possible return of products can be estimated reliably, and there is no continuing management involvement with the products. If it is probable that discounts will be granted and the amount can be measured reliably,
Other revenues are proceeds from royalties, rental income, pub management services and technical services to third parties, net of sales tax. Royalties are recognised in profit or loss on an accrual basis in accordance with the substance of the relevant agreement. Rental income, pub management services and technical services are recognised in profit or loss when the services have been delivered.
Other income
Payments made under operating leases are recognised in profit or loss on a straight-line basis over the term of the lease. Lease incentives received are recognised in profit or loss as an integral part of the total lease expense, over the term of the lease.
Minimum lease payments under finance leases are apportioned between the finance expense and the reduction of the outstanding liability. The finance expense is allocated to each period during the lease term so as to produce a constant periodic rate of interest on the remaining balance of the liability. Contingent lease payments are accounted for by revising the minimum lease payments over the remaining term of the lease when the lease adjustment is confirmed.
Government grants are recognised at their fair value when it is reasonably assured that HEINEKEN will comply with the conditions attaching to them and the grants will be received. Government grants relating to P, P & E are deducted from the carrying amount of the asset. Government grants relating to costs are deferred and recognised in profit or loss over the period necessary to match them with the costs that they are intended to compensate.
Interest income and expenses are recognised as they accrue in profit or loss, using the effective interest method unless collectability is in doubt. 3. Significant accounting policies continued Borrowing costs that are not directly attributable to the acquisition, construction or production of a qualifying asset are recognised in profit or loss using the effective interest method. Other net finance income and expenses comprises dividend income, gains and losses on the disposal of available-for-sale investments, changes in the fair value of investments designated at fair value through profit or loss and held for trading investments, changes in fair value of hedging instruments that are recognised in profit or loss, unwinding of the discount on provisions, Foreign currency gains and losses are reported on a net basis in the other net finance income and expenses.
Income tax comprises current and deferred tax. Current tax and deferred tax are recognised in
Current tax is the expected income tax payable or receivable in respect of taxable
Deferred tax is recognised in respect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and their tax bases. Deferred tax temporary temporary differences taxable temporary differences arising on the initial recognition of goodwill. The measurement of deferred tax assets and liabilities reflects the tax consequences that would follow the manner in which the Company expects, at the end of the reporting period, to recover or settle the carrying amount of its assets and liabilities. Deferred tax is determined using tax rates (and laws) that have been enacted or Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax liabilities and assets, and they relate to income taxes levied by the same tax authority on the same taxable entity, or on different taxable entities which intend either to settle current tax liabilities and assets on a net basis or to realise the assets and settle the liabilities simultaneously.
A deferred tax asset is recognised for unused tax losses, tax credits and deductible temporary differences, to the extent that it is probable that future taxable profits will be available against which they can be utilised. Deferred tax assets are reviewed at each balance sheet date and are reduced to the extent that it is no longer probable that the related tax benefit will be realised.
In determining the amount of current and deferred income tax, the Company takes into account the impact of uncertain income tax positions and whether additional taxes and interest may be due. This assessment relies on estimates and assumptions and may involve a series of judgements about future events. New information may become available that causes the Company to change its judgement regarding the adequacy of existing tax liabilities; such changes to tax liabilities will impact the income tax expense in the period that such a determination is made.
A discontinued operation is a component of
HEINEKEN presents basic and diluted earnings per share (EPS) data for its ordinary shares. Basic EPS is calculated by dividing the profit or loss attributable to ordinary shareholders of the Company by the weighted average number of ordinary shares outstanding during the 3. Significant accounting policies continued
The cash flow statement is prepared using the indirect method. Changes in balance sheet items that have not resulted in cash flows such as translation differences, fair value changes, equity-settled share-based payments and other non-cash items have been eliminated for the purpose of preparing this statement. Assets and liabilities acquired as part of a business combination are included in investing activities (net of cash acquired). Dividends paid to ordinary shareholders are included in financing activities. Dividends received are classified as operating activities. Interest paid is also included in operating activities. 3. Significant accounting policies continued
Operating segments are reported in a manner consistent with the internal reporting provided to the Executive Board, Inter-segment transfers or transactions are entered into under the normal commercial terms and conditions that would also be available to unrelated third parties. Segment results, assets and liabilities that are reported to the Executive Board include items directly attributable to a segment as well as those that can be allocated on a reasonable basis. Unallocated result items comprise net finance expenses and income tax expenses. Unallocated assets comprise current other investments and cash call deposits. Segment capital expenditure is the total cost incurred during the period to acquire P, P & E, and intangible assets other than goodwill.
Emission rights are related to the emission of
IFRS 9, published in July 2014, replaces existing guidance in IAS 39 Financial
financial instruments from IAS
IFRS 15 establishes a comprehensive framework for determining whether, how much and
The following new or amended standards are not expected to have a significant impact of HEINEKEN consolidated financial statements: Bearer Plants (amendments to IAS 16 and
IFRS
4. Determination of
General A number of HEINEKEN’s accounting policies and disclosures require the determination of fair value, for both financial and non-financial assets and liabilities. Fair values have been determined for measurement and/or disclosure purposes based on the following methods. When applicable, further information about the assumptions made in determining fair values or for the purpose of impairment testing is disclosed in the notes specific to that asset or liability. Fair value as a result of business combinations
The fair value of P, P & E recognised as a result of a business combination is based on
The fair value of brands acquired in a business combination is based on the ‘relief of royalty’ method or determined using the multi-period excess earnings method. The fair value of customer relationships acquired in a business combination is determined using the multi-period excess earnings method, whereby the subject asset is valued after deducting a fair return on all other assets that are part of creating the related cash flows. The fair value of reacquired rights and other intangible assets is based on the discounted cash flows expected to be derived from the use and eventual sale of the assets.
The fair value of inventories acquired in a business combination is determined based on its estimated selling price in the ordinary course of business less the estimated costs of completion and sale, and a reasonable profit margin based on the effort required to complete and sell the inventories.
The fair value of trade and other receivables is estimated at the present value of future cash flows, discounted at the market rate of interest at the reporting date. This fair value is determined for disclosure purposes or when acquired in a business combination. Fair value from normal business
The fair value of financial assets at fair value through profit or loss, held-to-maturity investments and available-for-sale financial assets is determined by reference to their quoted closing bid price at the reporting date or, if unquoted, determined using an appropriate valuation technique. The fair value of held-to-maturity investments is determined for disclosure purposes only. In case the quoted price does not exist at the date of exchange or in case the quoted price exists at the date of exchange but was not used as the cost, the investments are valued indirectly based on discounted cash flow models.
The fair value of derivative financial instruments is based on their listed market price, if available. If a listed market price is not available, Fair values
Fair value, which is determined for disclosure purposes or when fair value hedge accounting is applied, is calculated based on the present value of future principal and interest cash flows, discounted at the market rate of interest at the reporting date. For finance leases, the market rate of interest is determined by reference to similar lease agreements. Fair values
HEINEKEN distinguishes the following six reportable segments:
Western Europe
Central and Eastern Europe
The Americas
Africa
Asia Pacific
Head Office and Other/eliminations. The first five reportable segments as stated above are Information regarding the results of each reportable segment is included in the table on the next page. Performance is measured based on EBIT (beia), as included in the internal management reports that are reviewed by the Executive Board. EBIT (beia) is defined as earnings before interest and taxes and net finance expenses, before exceptional items and amortisation of HEINEKEN has multiple distribution models to deliver goods to end customers. There is no reliance on major clients. Deliveries to end consumers are done in some countries via own wholesalers or own pubs, in other markets directly and in some others via third parties. As such, distribution models are Inter-segment pricing is determined on an
Information about reportable segments
5. Operating segments continued
6. Acquisitions and disposals of subsidiaries and non-controlling interests
On 27 October 2014, HEINEKEN acquired a 98.86 per cent direct stake in Zagorka AD from Brewmasters Holdings. Prior to the transaction, HEINEKEN did not have control over the entity as it owned an indirect stake of 49.43 per cent through Brewmasters Holdings, of which HEINEKEN owns 50 per cent. The Previously Held Equity Interest (PHEI) in the acquired business is accounted for at fair value as per the acquisition date. The fair value of the
The following table summarises the major classes
Acquisition-related costs of
Acquisitions of non-controlling interests In 2014, HEINEKEN acquired
Disposals Disposal of
On 10 September 2014, HEINEKEN 7. Assets and liabilities (or disposal groups) classified as held for sale
A forward exchange contract was entered into to hedge the expected US dollar proceeds to Euro. Upon rollover of the forward contract in December 2014, a EUR33 million settlement payment was made. This is presented on the line ‘Disposal of subsidiaries, net of cash disposed of’ in the consolidated statement of cash flows and included in the hedge reserve until the consideration is received. Assets and liabilities classified as held for sale
8. Other income
Included in other income is the gain of HEINEKEN’s PHEI in Zagorka, amounting to EUR51 million (refer to note 6). In 9. Raw materials, consumables and services
Other expenses mainly include rentals of 10. Personnel expenses
Spain, the United Kingdom, Poland and Nigeria. The average number of full-time equivalent (FTE) employees during the year was:
11. Amortisation, depreciation and impairments
12. Net finance income and Recognised in profit or loss
The 13. Income tax expense Recognised in profit or loss
Reconciliation of the effective tax rate
13. Income tax expense continued
The reported tax rate Income tax recognised in other comprehensive income
14. Property, plant and equipment
Impairment losses In Financial lease assets
Security to authorities Certain P, P & E Property, plant and equipment under construction P, P & E under construction mainly relates to expansion of the brewing capacity in Capitalised borrowing costs During 15. Intangible assets
The carrying amount of our CGU in Tunisia has been reduced to its recoverable amount through recognition of a EUR16 million impairment loss against goodwill and EUR2 million against brands. Brands, customer-related and The main brands capitalised are the brands acquired in 2008: Scottish & Newcastle (Fosters and Strongbow) Impairment tests for cash-generating units containing goodwill For the purpose of impairment testing, goodwill in respect of Western Europe, Central and Eastern Europe (excluding Russia) The
Throughout the year,
The key assumptions used for the value-in-use calculations are as follows:
Cash flows were projected based on actual operating results and the three-year business plan. Cash flows for a further seven-year period were extrapolated using expected annual per country volume growth rates, which are based on external sources. Management believes that this
The beer price growth per year after the first three-year period is assumed to be at specific per country expected annual long-term inflation, based on external sources.
Cash flows after the first
A per CGU-specific pre-tax Weighted Average Cost of Capital (WACC) was applied in determining the recoverable amount of the units. The values assigned to the key assumptions used for the value in use calculations are as follows: 15. Intangible assets continued
The
Sensitivity to changes in assumptions
16. Investments in associates and joint ventures HEINEKEN has
equity method.
17. Other investments and receivables
17. Other investments and receivables continued Effective interest rates on loans to customers The decrease in indemnification receivable The other receivables mainly originate from the acquisition of the beer operations of FEMSA and represent a receivable on the Brazilian The main available-for-sale investments are S.A. Des Brasseries du Cameroun, Sensitivity analysis – equity price risk
HEINEKEN’s financial position. 18. Deferred tax assets and liabilities Recognised deferred tax assets and liabilities Deferred tax assets and liabilities are attributable to the following items:
Tax losses carry forward HEINEKEN has tax losses carry forward for an amount of EUR1,493 million as at 31 December 2014 (2013: EUR1,906 million), which expire in the following years: 18. Deferred tax assets and liabilities continued
The unrecognised losses relate to entities for which it is not probable that taxable profit will be available to offset these losses. The a prior acquisition. Movement in deferred tax
19. Inventories
During made. 20. Trade and other receivables
A net impairment loss of 21. Cash and cash equivalents
22. Capital and reserves Share
As at 31 December The Company’s authorised capital amounts to The holders of ordinary shares are entitled to receive dividends as declared from time to time and are entitled to one vote per share at meetings of the Company. In respect of the Company’s shares that are held by HEINEKEN (see next page), rights are suspended. As at 31 December 2014, the share premium amounted to EUR2,701 million (2013: EUR2,701 million). Translation reserve The translation reserve comprises foreign currency differences arising from the translation of the financial statements of foreign operations of
22. Capital and
Hedging reserve This reserve comprises the effective portion of the cumulative net change in the fair value of cash flow hedging instruments where the hedged transaction has not yet occurred. HEINEKEN considers this a legal reserve. Fair value reserve This reserve comprises the cumulative net change in the fair value of available-for-sale investments until the investment is derecognised or impaired. HEINEKEN considers this a legal reserve. Other legal reserves These reserves relate to the share of profit of joint ventures and associates over the distribution of which HEINEKEN does not have control. The movement in these reserves reflects retained earnings of joint ventures and associates minus dividends received. In case of a legal or other restriction which Reserve for own shares The reserve for the Company’s own shares comprises the cost of the Company’s shares held by HEINEKEN. As at 31 December
LTV During the period
Dividends The following dividends were declared and paid by HEINEKEN:
After the balance sheet date, the Executive Board proposed the following dividends. The dividends, taking into account the interim dividends declared and paid, have not been provided for.
Non-controlling interests The non-controlling interests (NCI) relate to minority stakes held by third parties in HEINEKEN consolidated subsidiaries. The total non-controlling interest as at 31 December 2014 amounted to EUR1,043 million (2013: EUR954 million). Refer to note 36 for the disclosure of material NCIs. 23. Earnings per share Basic earnings per share The calculation of basic earnings per share
Diluted earnings per share The calculation of diluted earnings per share Weighted average number of shares – basic and diluted
24. Income tax on other comprehensive income
25. Loans and borrowings This note provides information about the contractual terms of Non-current liabilities
Current interest-bearing liabilities
Net interest-bearing debt position
Non-current liabilities
Terms and debt repayment schedule Terms and conditions of outstanding non-current and current loans and borrowings were as follows:
Incurrence covenant1 HEINEKEN has an incurrence covenant in some of its financing facilities. This incurrence covenant is calculated by dividing
26. Finance lease liabilities Finance lease liabilities are payable as follows:
27. Non-GAAP measures In the internal management reports, HEINEKEN measures its performance primarily based on EBIT and EBIT The table below presents the relationship
27. Non-GAAP measures continued The 2014 exceptional items included in EBIT contain the amortisation of
EBIT and EBIT (beia) are not financial measures calculated in accordance with IFRS. The presentation 28. Employee benefits
HEINEKEN makes contributions to
countries. The defined benefit plans in the Netherlands and the UK combined cover HEINEKEN provides employees in the
liabilities thus relate to past service before plan closure. Based on the Other countries where HEINEKEN offers a defined benefit plan to (former) employees are: Austria (closed in 2007 to new entrants), Belgium, Greece (closed in 2014 to new entrants), Ireland (closed in 2012 to all future accrual), Mexico (plan changed to hybrid defined contribution for majority of employees in 2014), Nigeria (closed to new entrants in 2007), Portugal, Spain (closed to management in 2010) and Switzerland. 28. Employee benefits continued The In other countries, the pension plans are defined contribution plans and/or similar arrangements for employees. Other long-term employee benefits mainly relate to long-term bonus plans, termination benefits, medical plans and jubilee benefits. 28. Employee benefits continued Movement in net defined benefit obligation The movement in the defined benefit obligation over the year is as follows:
The defined benefit plan in the Netherlands was amended to reflect changes in legal requirements. From 1 January 2015, the annual accrual rate was reduced to the legal maximum rate of 1.875 per cent and a salary cap was introduced. As a result, the defined benefit obligation in the Dutch plan decreased by EUR88 million. A corresponding past service credit was recognised in profit or loss during 2014. Defined benefit plan assets
28. Employee benefits continued The HEINEKEN pension funds monitor the mix of debt and equity securities in their investment portfolios based on market expectations. Material investments within the portfolio are managed on an individual basis. Through its defined benefit pension plans, HEINEKEN is exposed to a number of risks, the most significant which are detailed below: Asset volatility The plan liabilities are calculated using a discount rate set with reference to corporate bond yields. If plan assets underperform this yield, this will create a deficit. Both the Netherlands and the UK plans hold a significant proportion of equities, which are expected to outperform corporate bonds in the long term, while providing volatility and risk in the short term. In the Netherlands, an Asset-Liability Matching (ALM) study is performed at least on a triennial basis. The ALM study is the basis for the strategic investment policies and the (long-term) strategic investment mix. This resulted in a strategic asset mix comprising 35 per cent equity securities, 40 per cent bonds, 10 per cent property and real estate and 15 per cent other investments. The objective is to hedge currency risk on the US dollar, Japanese yen and British pound for 50 per cent in the strategic investment mix. In the UK, an Asset-Liability Matching study is performed at least on a triennial basis. The ALM study is the basis for the strategic investment policies and the (long-term) strategic investment mix. This resulted in a strategic asset mix comprising 29 per cent equity securities (including synthetic exposure from derivatives), 35 per cent bonds (including synthetic exposure from derivatives), 5 per cent property and real estate and 31 per cent other investments. The objective is to hedge currency risk on developed non-GBP equity market exposures for 70 per cent, with US dollar currency risk on other investments hedged 100 per cent in the strategic investment mix. Interest rate risk A decrease in corporate bond yields will increase plan liabilities, although this will be partially offset by an increase in the value of the In the Netherlands, interest rate risk is partly managed through fixed income investments. These investments match the liabilities for 20.1 per cent (2013: 23.4 per cent). In the UK, interest rate risk is partly managed through the use of a mixture of fixed income investments and interest rate swap instruments. These investments and instruments match the liabilities for 24.7 per cent (2013: 29.2 per cent). Inflation risk Some of the HEINEKEN provides employees in the Netherlands with an average pay pension plan, whereby indexation of accrued benefits is conditional on the funded status of the pension fund. In the UK, inflation sensitivity is based on capped Consumer Price Inflation for deferred members and Life expectancy The Principal actuarial assumptions as at the balance sheet date Based on the significance of the Dutch and UK pension plans compared with the other plans, the table below only includes the major actuarial assumptions for those two plans as at 31 December:
28. Employee benefits continued For the other defined benefit plans the following actuarial assumptions apply at 31 December:
Assumptions regarding future mortality rates are based on published statistics and mortality tables. For the Netherlands, the rates are obtained from the ‘AG-Prognosetafel 2014’, fully generational. Correction factors from Towers Watson are applied on these. For the UK, the rates are obtained from the Continuous Mortality Investigation 2011 projection model. The weighted average duration of the defined benefit obligation at the end of the reporting period is 18 years. HEINEKEN expects the
Reasonably possible changes at the reporting date to one of the relevant actuarial assumptions, holding other assumptions constant, would have affected the defined benefit obligation by the amounts shown below:
Although the analysis does not take account of the full distribution of cash flows expected under the plan, it does provide an approximation of the sensitivity of the assumptions shown. 29. Share-based payments – Long-Term Variable Award
The performance conditions for LTV At target performance, 100 per cent of the awarded The performance period for
29. Share-based payments – Long-Term Variable Award continued The vesting date for the Executive Board is As HEINEKEN will withhold the tax related to vesting on behalf of the individual employees, the number of The terms and conditions of the share rights granted are as follows:
Under the LTV 2011-2013, a total of 24,403 (gross) shares vested for the Executive Board and 191,827 (gross) shares vested for senior management. Based on management and the Executive Board. The number,
29. Share-based payments –
Personnel expenses
30. Provisions
Restructuring The provision for restructuring of Other provisions Included are, Greece The Company’s subsidiary Athenian Brewery S.A. has been subject to an investigation and subsequent legal procedure initiated by the Hellenic Competition Commission in relation to a possible abuse of dominance situation in the Greek beer market. Athenian Brewery S.A. denies it is involved in such violation. The outcome of this case cannot be reliably predicted at this moment. 31. Trade and other payables
32. Financial risk management and financial instruments Overview HEINEKEN has exposure to the following risks from its use of financial instruments, as they arise in the normal course of HEINEKEN’s business:
Credit risk
Market This note presents information about HEINEKEN’s exposure to each of the above risks, and it summarises HEINEKEN’s policies and processes that are in place for measuring and managing risk, including those related to capital management. Further quantitative disclosures are included throughout these consolidated financial statements. Risk management framework The Executive Board, under the supervision of the Supervisory Board, has overall responsibility and sets rules for HEINEKEN’s risk management and control systems. They are reviewed regularly to reflect changes in market conditions and The Global Treasury function focuses primarily on the management of financial risk and financial resources. Some of the risk management strategies include the use of derivatives, primarily in the form of spot and forward exchange contracts and interest rate swaps, but options can be used as well. It is Credit risk Credit risk is the risk of financial loss to HEINEKEN if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and it arises principally from HEINEKEN’s receivables from customers and investment securities.
As at the balance sheet date, there were no significant concentrations of credit risk. The maximum exposure to credit risk is represented by the carrying amount of each financial instrument, including derivative financial instruments, in the consolidated statement of financial position. Loans to customers HEINEKEN’s exposure to credit risk is mainly influenced by the individual characteristics of each customer. HEINEKEN’s held-to-maturity investments 32. Financial risk management and financial instruments continued HEINEKEN establishes an allowance for impairment of loans that represents its estimate of incurred losses. The main components of this allowance are a specific loss component that relates to individually significant exposures, and a collective loss component established for groups of similar customers in respect of losses that have been incurred but not yet identified. The collective loss allowance is determined based on historical data of payment statistics. In a few countries, the Trade and other receivables HEINEKEN’s local management has credit policies in place and the exposure to credit risk is monitored on an ongoing basis. Under the credit policies, all customers requiring credit over a certain amount are reviewed and new customers are analysed individually for creditworthiness before HEINEKEN’s standard payment and delivery terms and conditions are offered. HEINEKEN’s review includes external ratings, where available, and in some cases bank references. Purchase limits are established for each customer and these limits are reviewed regularly. As a result of the deteriorating economic circumstances since 2008, certain purchase limits have been redefined. Customers that fail to meet HEINEKEN’s benchmark creditworthiness may transact with HEINEKEN only on a prepayment basis. In monitoring customer credit risk, customers are, on a country HEINEKEN has multiple distribution models to deliver goods to end customers. Deliveries are done in some countries via own wholesalers, in other markets directly and in some others via third parties. As such distribution models are HEINEKEN establishes an allowance for impairment that represents its estimate of incurred losses in respect of trade and other receivables and investments. The components of this allowance are a specific loss component and a collective loss component. Advances to customers Advances to customers relate to an upfront In monitoring customer credit risk, refer to the paragraph above relating to trade and other receivables. Investments HEINEKEN limits its exposure to credit risk by only investing available cash balances in liquid securities and only with counterparties that have Guarantees HEINEKEN’s policy is to avoid issuing guarantees where possible unless this leads to substantial benefits for
Exposure to credit risk The carrying amount of financial assets represents the maximum credit exposure. The maximum exposure to credit risk at the reporting date was:
The maximum exposure to credit risk for trade and other receivables (excluding current derivatives) at the reporting date by geographic region was:
Impairment losses The ageing of trade and other receivables (excluding current derivatives) at the reporting date was:
The movement in the allowance for impairment in respect of trade and other receivables (excluding current derivatives) during the year was as follows:
The movement in the allowance for impairment in respect of loans during the year was as follows:
Impairment losses recognised for trade and other receivables (excluding current derivatives) and loans to customers are part of the other non-cash items in the consolidated statement of cash flows. The income statement impact of The allowance accounts in respect of trade and other receivables and held-to-maturity investments are used to record impairment losses, unless HEINEKEN is satisfied that no recovery of the amount owing is Liquidity risk Liquidity risk is the risk that HEINEKEN will encounter difficulty in meeting the obligations associated with its financial liabilities that are settled by delivering cash or another financial asset. HEINEKEN’s approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to HEINEKEN’s reputation.
Contractual maturities The following are the contractual maturities of non-derivative financial liabilities and derivative financial assets and liabilities, including interest
The total carrying amount and contractual cash flows of derivatives are included in trade and other receivables
Market risk Market risk is the risk that changes in market prices, such as foreign exchange rates, interest rates, commodity prices and equity prices, will adversely affect HEINEKEN’s income or the value of its holdings of financial instruments. The objective of market risk management is to manage and control market risk exposures within acceptable parameters, HEINEKEN uses derivatives in the ordinary course of business, and also incurs financial liabilities, in order to manage market risks. Generally, HEINEKEN seeks to apply hedge accounting or make use of natural hedges in order to minimise the effects of foreign currency fluctuations in profit or loss. 32. Financial risk management and financial instruments continued Derivatives that can be used are interest rate swaps, forward rate agreements, caps and floors, commodity swaps, spot and forward exchange contracts and options. Transactions are entered into with a limited number of counterparties with strong credit ratings. Foreign currency, interest rate and commodity hedging operations are governed by internal policies and rules approved and monitored by the Executive Board. Foreign currency risk HEINEKEN is exposed to foreign currency risk on (future) sales, (future) purchases, borrowings and In managing foreign currency risk, HEINEKEN aims to reduce the impact of short-term fluctuations on earnings. Over the longer term, however, permanent changes in foreign exchange rates would have an impact on profit. HEINEKEN hedges up to 90 per cent of its mainly intra-HEINEKEN US dollar cash flows on the basis of rolling cash flow forecasts in respect to
It is HEINEKEN’s policy to provide intra-HEINEKEN financing in the functional currency of subsidiaries where possible to prevent foreign currency exposure on a subsidiary level. The resulting exposure at Group level is hedged by means of forward exchange contracts. Intra-HEINEKEN financing in foreign currencies is mainly in British pounds, US dollars, Swiss The principal amounts of HEINEKEN’s US dollar, British pound, In respect of other monetary assets and liabilities denominated in currencies other than the functional currencies of the Company and the various foreign operations, HEINEKEN ensures that its net exposure is kept to an acceptable level by buying or selling foreign currencies at spot rates when necessary to address short-term imbalances. Exposure to foreign currency risk HEINEKEN’s transactional exposure to the British pound, US dollar and
32. Financial risk management and financial instruments continued Included in the US dollar amounts are intra-HEINEKEN cash flows. Sensitivity analysis A 10 per cent strengthening of the A 10 per cent weakening of the Interest rate risk In managing interest rate risk, HEINEKEN aims to reduce the impact of short-term fluctuations on earnings. Over the longer term, however, permanent changes in interest rates would have an impact on profit. HEINEKEN opts for a mix of fixed and variable interest rates in its financing operations, combined with the use of interest rate instruments. Currently, HEINEKEN’s interest rate position is more weighted towards fixed Swap maturity follows the maturity of the related loans and borrowings Interest rate risk – At the reporting date, the interest rate profile of
32. Financial risk management and financial instruments continued Fair value sensitivity analysis for fixed rate instruments
A change of 100 basis points in interest rates
Cash flow sensitivity analysis for variable rate instruments A change of 100 basis points in interest rates constantly applied during the reporting period would have increased (decreased) equity and profit or loss by the amounts shown below (after tax). This analysis assumes that all other variables, in particular foreign currency rates, remain constant and excludes any possible change in fair value of derivatives at period-end because of a change in interest rates. The analysis is performed on the same basis as for
Commodity price risk Commodity price risk is the risk that changes in commodity prices will affect Sensitivity analysis for aluminium hedges The table below shows an estimated impact of 10 per cent change in the market price of aluminium.
Cash flow hedges The following table indicates the periods in which the cash flows associated with derivatives that are cash flow hedges are expected to 32. Financial risk management and financial instruments continued
The periods in which the cash flows associated with forward exchange contracts that are cash flow hedges are expected to impact profit or loss is on average two months earlier than the occurrence of the cash flows as in the above table.
of these borrowings at 31 December 2014 was EUR520 million (2013: EUR273 million), and no ineffectiveness was recognised in profit and loss in 2014 (2013: nil). Capital management There were no major changes in HEINEKEN’s approach to capital management during the year. The Executive Board’s policy is to maintain a strong capital base so as to maintain investor, creditor and market confidence and to sustain future development of the business and acquisitions. Capital is herein defined as equity attributable to equity holders of the Company (total equity minus non-controlling interests). HEINEKEN is not subject to externally imposed capital requirements other than the legal reserves explained in note 22. Shares are purchased to meet the requirements Fair values The fair values of financial assets and liabilities that differ from the carrying amounts shown in the statement of financial position are as follows: 32. Financial risk management and financial instruments continued
Basis for determining fair values The significant methods and assumptions used in estimating the fair values of financial instruments reflected in the table above are discussed in note 4. Fair value hierarchy
Quoted prices (unadjusted) in active markets for identical assets or liabilities (level 1)
Inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices) (level 2)
Inputs for the asset or liability that are not based on observable market data (unobservable inputs) (level 3)
There were no transfers between level 1 and level 2 of the fair value hierarchy during the period ended 31 December 2014. Level 2 HEINEKEN determines level 2 fair values for over-the-counter securities based on broker quotes. The fair values of simple over-the-counter derivative financial instruments are determined by using valuation techniques. These valuation techniques maximise the use of observable market data where available. The fair value of derivatives is calculated as the present value of the estimated future cash flows based on observable interest yield curves, basis spread and foreign exchange rates. These calculations are tested for reasonableness by comparing the outcome of the internal valuation with the valuation received from the counterparty. Fair values reflect the credit risk of the instrument and include adjustments to take into account the credit risk of HEINEKEN and counterparty when appropriate. Level 3 Details of the determination of level 3 fair value measurements as at 31 December 2014 are set out below:
The fair values for the level 3 available-for-sale investments are based on the financial performance of the investments and the market multiples of comparable equity securities. 33. Off-balance sheet commitments
HEINEKEN leases buildings, cars and equipment in the ordinary course of business. Raw material contracts include long-term purchase contracts with suppliers in which prices are fixed or will be agreed based upon predefined price formulas. These contracts mainly relate to malt, bottles and cans. During the year ended 31 December Other off-balance sheet obligations mainly include distribution, rental, service and sponsorship contracts. Committed bank facilities are credit facilities on which a commitment fee is paid as compensation for the bank’s requirement to reserve capital. 34. Contingencies
Brazil As part of the acquisition of the beer operations of FEMSA in 2010, HEINEKEN As is customary in Brazil, Guarantees
Guarantees to banks for loans relate to loans to customers, which are given 35. Related parties Identification of related parties HEINEKEN’s parent company is Heineken Holding N.V. HEINEKEN’s ultimate controlling party is Mrs. de Carvalho-Heineken. Our shareholder structure is set out in the section ‘Shareholder Information’. In addition, HEINEKEN has Key management remuneration
Executive Board The remuneration of the members of the Executive Board comprises a fixed component and a variable component. The variable component is made up of a Short-Term Variable pay (STV) and a Long-Term Variable As at 31 December
The matching share In 2013, the CEO and CFO were rewarded with an extraordinary share award of EUR2.52 million for
Mr. René Hooft Graafland will resign from the Executive Board as from 24 April 2015 and his employment contract ends 1 May 2015. A severance payment of EUR2 million will be made upon resignation and is recognised in the 2014 income statement. This resignation is considered a retirement under the LTV plan rules, which implies that unvested LTV awards as of 1 May 2015 will continue to vest at their regular vesting dates, insofar and to the extent that predetermined performance conditions are met. 35. Related parties continued As a result, the expenses for the LTV awards 2013-2015 and 2014-2016 have been accelerated from their usual rate of one-third per year to a rate which ensures full expensing on 1 May 2015 rather than on 31 December 2015 and 2016. The impact of this acceleration in expensing for Mr. René Hooft Graafland is approximately EUR0.2 million. 35. Related parties continued Supervisory Board The individual members of the Supervisory Board received the following remuneration:
Other related party transactions
Heineken Holding N.V. In This payment is based on an agreement of 1977 as amended in 2001, providing that FEMSA As consideration for In April, HEINEKEN entered into a sale and leaseback transaction with FEMSA relating to logistics assets in Mexico. The The relating operating lease expenses are included in Other Expenses – FEMSA. 36. HEINEKEN entities Control of HEINEKEN The shares and options of the Company are traded on Euronext Amsterdam, where the Company is included in the main AEX A declaration of joint and several liability pursuant to the provisions of Section 403, Part 9, Book 2, of the Dutch Civil Code has been issued with respect to legal entities established in the Pursuant to the provisions of Article 17 (1) of the Republic of Ireland Companies (Amendment) Act 1986, the Company issued irrevocable guarantees in respect of the financial year from 1 January 2014 up to and including 31 December 2014 in respect of the liabilities referred to in Article 5(c)(ii) of the Republic of Ireland Companies (Amendment) Act 1986 of the wholly-owned subsidiary companies Heineken Ireland Limited, Heineken Ireland Sales Limited, West Cork Bottling Limited, Western Beverages Limited, Beamish & Crawford Limited and Nash Beverages Limited. Significant subsidiaries Set out below are HEINEKEN’s significant subsidiaries at 31 December 2014. The subsidiaries as listed below are held by the Company and the proportion of ownership interests held equals the proportion of the voting rights held by HEINEKEN. The country of incorporation or registration is also their principal place of business.
On 31 December 2014, Nigerian Breweries Plc. completed the merger with Consolidated Breweries Ltd. HEINEKEN’s shareholding in Nigerian Breweries Plc. increased from 54.10 per cent to 54.29 per cent as a result of the merger. The transaction was treated as a common control transaction in the HEINEKEN consolidated financial statements. Locally, the acquisition is accounted for as a business combination, hence there are differences between the values below and the statutory financial statements of Nigerian Breweries Plc. The NCI in Nigerian Breweries Plc. is dispersed without any shareholder having an interest of more than 16 per cent. Set out below is the summarised financial information for Nigerian Breweries Plc. which has a non-controlling interest material to HEINEKEN.
37. Subsequent events
Executive and Supervisory Board statement The members of the Supervisory Board signed the financial statements in order to comply with their statutory obligation pursuant to Article 2:101, paragraph 2, of the Dutch Civil Code. The members of the Executive Board signed the financial statements in order to comply with their statutory obligation pursuant to Article 2:101, paragraph 2, of the Dutch Civil Code and Article 5:25c, paragraph 2 sub c, of the Financial Markets Supervision Act.
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