Country’s New Taxes on Sugary Drinks, Junk Foods Have No Impact on Expansions
Two of the world’s largest drink and snack makers are pouring billions of dollars into their Mexican operations, sending powerful signals the country is too lucrative to avoid despite hefty new “fat” taxes on sugary drinks and high-calorie snacks.
U.S.-based PepsiCoInc.—which sells Sabritas chips, Gamesa GAM.MC +2.70%cookies and its Pepsi-Cola soda in Mexico—said on Friday it will invest $5 billion over the next five years to boost manufacturing, product development and marketing in Latin America’s second-most-populous country.
Switzerland’s Nestlé SA, NESN.VX -0.15% the world’s largest food manufacturer by revenue, said separately that it will spend $1 billion to build an infant nutrition factory in western Mexico and a pet food factory in central Mexico. It is also expanding a breakfast cereal factory to make Cheerios and Nesquik.
The major investments come despite Mexico’s introduction on Jan. 1 of an 8% tax on high-calorie foods like potato chips, chocolate and ice cream and a roughly 12% tax on soda. Mexico says seven in 10 adults and a third of the country’s children are overweight or obese.
The government’s aggressive move has fanned concern among food and beverage companies that other countries could follow suit. Three other Latin American countries—Peru, Uruguay and Costa Rica—have already banned so-called junk foods from public schools since 2012.
But many companies continue to see Mexico as a major source of growth amid slowing sales in other parts of the world. Mexico’s government is projecting the country’s economy will expand 3.9% in 2014, up from 1.3% last year, amid signs consumer spending is rebounding.
Nestlé Chief Executive Paul Bulcke said the investment reflects “our commitment to Mexico, and our long-term vision in a market with high growth potential.”
Foreign direct investment in Mexico soared to $28.2 billion in the first nine months of 2013 compared with $15 billion in all of 2012. Much of the jump was tied to Belgian brewer Anheuser-Busch InBev NV’s takeover of leading Mexican brewer Grupo Modelo SAB. U.S. snack maker Mondelez International also began construction last year of what it said would be the world’s biggest cookie factory, with a $350 million investment. The factory will open in the second half of this year, the company said.
Mondelez has said the new taxes aren’t affecting construction of its factory. Soda giant Coca-ColaCo. said it’s not altering its five-year, $5 billion investment plan in Mexico that runs through 2014 but wouldn’t comment on future plans.
PepsiCo PEP +1.07% and Nestle declined to say how the new taxes, which include a 16% sales tax on processed pet foods beginning this month, affected their investment planning. Both said on Friday they remain bullish on Mexico.
“We see tremendous opportunities to further expand our food and beverage business,” PepsiCo Chairwoman Indra Nooyi said in a statement, adding the company “is confident in Mexico’s future.”
Mexico was PepsiCo’s third-largest country in 2012 by revenue, behind only the U.S. and Russia, with $4 billion or 6% of the company’s $65.49 billion in global sales. Mexico is Nestle’s sixth-largest market, with sales of 3.25 billion Swiss francs ($3.64 billion) in 2012.
Food and drink companies appear to be passing the new taxes on to Mexican consumers. Soda prices rose 11.4% in the first half of January, almost the same as the 12% soda tax. Meanwhile, taxes on sweet snacks including cookies rose roughly 6% over the same period, almost in line with the new 8% tax.
John Faucher, an analyst with J.P. Morgan, said in a note this week that the impact of the new taxes on PepsiCo’s snacks and beverage business in Mexico “remains opaque” but predicted it would crimp volume growth.
PepsiCo said Friday that its Mexican investments—which include agricultural projects with local farmers—would create 4,000 new jobs in the country. It currently has 40,000 employees in Mexico.