|
UNITED STATES | ||
FORM 20-F |
||
| ANNUAL
REPORT PURSUANT TO SECTION 13 OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended December 13, 2003 Commission file number: 1-14814 |
Fomento Económico Mexicano, S.A. 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) |
Colonia Bella Vista
Monterrey, NL 64410 Mexico
(Adress of Principal Executive Offices)
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 ten BD Units, each consisting of one Series B Share, two Series D-B Shares and two Series D-L Shares,
without par value |
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
The number of outstanding shares of each of the issuer’s classes of capital or common stock as of December 31, 2003 was:
639,892,590 ........ |
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 639,892,590 Series B Shares, 1,279,785,180 Series D-B Shares and 1,279,785,180 Series D-L Shares. |
419,569,500 ........ |
B Units, each consisting of five Series B Shares without par value. The B Units represent a total of 2,097,847,500 Series B Shares. |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed 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.
No
Indicate by check mark which financial statement item the registrant has elected to follow:
Item 18
TABLE OF CONTENTS
INTRODUCTION
References
The terms “FEMSA,” “our company,” “we,” “us” and “our,” are used in this annual report to refer to Fomento Económico Mexicano, S.A. de C.V. and, except where the context otherwise requires, its subsidiaries on a consolidated basis.
References to “U.S. dollars,” “US$,” “Dollars” or “$” are to the lawful currency of the United States. References to “Mexican pesos,” “Pesos” or “Ps. ” are to the lawful currency of the United Mexican States or Mexico.
Accounting Principles
We publish our financial statements in Mexican pesos and prepare our financial statements in accordance with Generally Accepted Accounting Principles in Mexico, which we refer to as Mexican GAAP. Mexican GAAP differs in certain significant respects from Generally Accepted Accounting Principles in the United States, which we refer to as U.S. GAAP. Notes 25 and 26 to our consolidated financial statements provide a description of the principal differences between Mexican GAAP and U.S. GAAP as they relate to our company and a reconciliation to U.S. GAAP of majority net income and majority stockholders’ equity.
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 the U.S. dollar amounts or could be converted into U.S. dollars at the rate indicated. Unless otherwise indicated, these U.S. dollar amounts have been translated from Mexican pesos at an exchange rate of Ps. 11.235 to US$1.00, the exchange rate quoted by dealers to FEMSA for the settlement of obligations in foreign currencies on December 31, 2003. On December 31, 2003 and on March 15, 2004, the noon buying rates for Mexican pesos as published by the Federal Reserve Bank of New York were Ps. 11.242 to US$1.00 and Ps. 10.975 to US$1.00, respectively. See “Item 3. Key Information—Exchange Rate Information—Mexican Pesos” for information regarding exchange rates since 1999.
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 the Instituto Nacional de Estadística, Geografía e Informática of Mexico (the National Institute of Statistics, Geography and Information, which we refer to as the Mexican Institute of Statistics), the Federal Reserve Bank of New York, Banco de México (the Bank of Mexico) and upon our estimates.
Forward-Looking Information
This annual report contains words, such as “believe,” “expect” and “anticipate” and similar expressions that identify forward-looking statements. Use of such words reflects our views about future events and financial performance. Actual results could differ materially from those projected in such 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 or international economic or political situations 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.
Presentation of Panamco
Our subsidiary, Coca-Cola FEMSA, S.A. de C.V., which we refer to as Coca-Cola FEMSA, acquired Corporación Interamericana de Bebidas, S.A. de C.V., formerly known as Panamerican Beverages, Inc. and which we refer to as Panamco, on May 6, 2003. Under Mexican GAAP, Panamco is included in our consolidated financial statements since May 2003 but is not included for periods prior to this date. As a result, our consolidated financial statements for the year ended and as of December 31, 2003 are not comparable to prior periods. The acquisition of Panamco only impacted the comparability of our consolidated information and of the Coca-Cola FEMSA segment. The comparability of our remaining segments was not affected by the acquisition.
Available Information
The materials referred to in this annual report, the annual report itself and its exhibits, may be inspected and copied at the SEC’s public reference room in Washington, D.C. Please call the SEC at 1-(800)-SEC-0330 for further information on the public reference room. In addition, we began making filings with the SEC’s EDGAR system in 2002. Any filings made electronically will be available to the public over the internet at the SEC’s web site at www.sec.gov. Additional information regarding Coca-Cola FEMSA can be found in its annual report on Form 20-F filed with the SEC on April 5, 2004. Coca-Cola FEMSA’s annual report does not constitute part of this annual report and is not incorporated by reference.
ITEM 1. NOT APPLICABLE
ITEM 2. NOT APPLICABLE
ITEM 3. KEY INFORMATION
Selected Financial Data
This annual report includes, under Item 18, our audited consolidated balance sheets as of December 31, 2003 and 2002 and the related consolidated income statements, changes in stockholders’ equity and changes in financial position for the years ended December 31, 2003, 2002 and 2001. Our consolidated financial statements are prepared in accordance with Mexican GAAP which differs in certain significant respects from U.S. GAAP. Notes 25 and 26 to our consolidated financial statements provide a description of the principal differences between Mexican GAAP and U.S. GAAP as they relate to FEMSA, together with a reconciliation to U.S. GAAP of net majority income, majority shareholders’ equity and certain other selected financial data. The effects of inflation accounting under Mexican GAAP have not been reversed in the reconciliation to U.S. GAAP. See Note 25 to our consolidated financial statements.
On May 6, 2003, our subsidiary Coca-Cola FEMSA acquired Panamco. Under Mexican GAAP, Panamco is included in our consolidated financial statements since May 2003 but is not included for periods prior to this date. As a result, our consolidated financial statements for the year ended and as of December 31, 2003 are not comparable to prior periods.
The following table presents selected financial information about us. This information should be read together with, and is qualified in its entirety by, our consolidated financial statements and the notes to those statements. The selected financial information is presented on a consolidated basis and is not necessarily indicative of our financial position or results of operations at or for any future date or period.
| Selected Consolidated Financial Information
Year Ended December 31, | ||||||
| 2003(1) | 2003 | 2002 | 2001 | 2000 | 1999 | |
| (in millions of U.S. dollars and Mexican pesos, except for per share data, the
weighted average number of shares outstanding and operating margin) | ||||||
| Income Statement Data: | ||||||
| Mexican GAAP: | ||||||
| Total revenues | $6,755 | Ps. 75,891 | Ps. 55,395 | Ps. 52,465 | Ps. 50,151 | Ps. 45,463 |
| Income from operations(2) | 1,078 | 12,114 | 9,878 | 8,902 | 7,995 | 7,234 |
| Taxes(3) | 300 | 3,378 | 3,764 | 3,069 | 2,615 | 2,253 |
| Change in accounting principle | — | — | — | (30) | — | — |
| Net income | 415 | 4,657 | 4,791 | 5,215 | 3,995 | 4,734 |
| Net majority income | 275 | 3,093 | 2,947 | 3,547 | 2,865 | 3,587 |
| Net minority income | 140 | 1,564 | 1,844 | 1,668 | 1,130 | 1,147 |
| Net majority income per share(4) | ||||||
| Series B Shares | 0.046 | 0.521 | 0.496 | 0.597 | 0.478 | 0.599 |
| Series D Shares | 0.058 | 0.651 | 0.620 | 0.747 | 0.599 | 0.749 |
| Weighted average number of shares outstanding (millions) | ||||||
| Series B Shares | 2,737.7 | 2,737.7 | 2,737.7 | 2,737.8 | 2,745.8 | 2,746.5 |
| Series D Shares | 2,559.6 | 2,559.6 | 2,559.6 | 2,559.8 | 2,591.8 | 2,594.8 |
| U.S. GAAP: | ||||||
| Total revenues | $6,755 | Ps. 75,891 | Ps. 55,048 | Ps. 54,815 | Ps. 52,154 | Ps. 48,296 |
| Income from operations(2) | 1,039 | 11,672 | 8,810 | 8,167 | 7,047 | 6,705 |
| Change in accounting principle | — | — | — | (54) | — | 21 |
| Net minority income | 143 | 1,608 | 1,876 | 1,645 | 1,200 | 1,145 |
| Net income | 291 | 3,271 | 3,206 | 3,305 | 2,673 | 2,306 |
| Net income per share(4) | ||||||
| Series B Shares | 0.049 | 0.551 | 0.540 | 0.557 | 0.446 | 0.385 |
| Series D Shares | 0.061 | 0.689 | 0.675 | 0.696 | 0.558 | 0.481 |
| Balance Sheet Data: | ||||||
| Mexican GAAP: | ||||||
| Total assets | $9,287 | Ps. 104,334 | Ps. 62,660 | Ps. 53,320 | Ps. 50,111 | Ps. 48,781 |
| Current liabilities | 1,488 | 16,716 | 12,314 | 8,954 | 8,759 | 8,834 |
| Long-term debt(5) | 2,968 | 33,345 | 10,192 | 7,399 | 8,005 | 8,343 |
| Other long-term liabilities | 728 | 8,175 | 5,856 | 5,568 | 5,592 | 978 |
| Capital Stock | 378 | 4,243 | 4,243 | 4,243 | 4,249 | 4,271 |
| Total shareholders’ equity | 4,103 | 46,098 | 34,298 | 31,399 | 27,755 | 30,626 |
| Majority interest | 2,528 | 28,400 | 24,024 | 22,127 | 19,509 | 21,813 |
| Minority interest | 1,575 | 17,698 | 10,274 | 9,272 | 8,246 | 8,813 |
| U.S. GAAP: | ||||||
| Total assets | $10,636 | Ps. 119,496 | Ps. 78,688 | Ps. 70,212 | Ps. 69,482 | Ps. 67,964 |
| Current liabilities | 1,711 | 19,220 | 14,142 | 10,964 | 11,006 | 11,188 |
| Long-term debt(5) | 3,130 | 35,160 | 11,308 | 8,507 | 8,029 | 8,350 |
| Other long-term liabilities | 515 | 5,789 | 5,019 | 5,015 | 6,543 | 6,632 |
| Capital Stock | 378 | 4,243 | 4,243 | 4,243 | 4,249 | 4,271 |
| Shareholders’ equity | 3,748 | 42,112 | 38,233 | 36,597 | 35,234 | 33,860 |
| Minority interest | 1,532 | 17,215 | 9,986 | 9,129 | 8,670 | 7,934 |
| Other information: | ||||||
| Mexican GAAP: | ||||||
| Depreciation(6) | $278 | Ps. 3,126 | Ps. 2,523 | Ps. 2,406 | Ps. 2,534 | Ps. 2,316 |
| Capital expenditures(7) | 604 | 6,789 | 5,780 | 5,531 | 4,764 | 4,536 |
| Operating margin(8) | 16.0% | 16.0% | 17.8% | 17.0% | 15.9% | 15.9% |
| U.S. GAAP: | ||||||
| Depreciation(6) | $285 | Ps. 3,199 | Ps. 2,400 | Ps. 2,393 | Ps. 2,450 | Ps. 2,227 |
| Operating margin(8) | 15.4% | 15.4% | 16.0% | 14.9% | 13.5% | 13.9% |
| __________________ | |
| (1) | Translation to U.S. dollar amounts at an exchange rate of Ps. 11.235 to US$1.00 solely for the convenience of the reader. |
| (2) | Includes income from operations and participation in results of affiliated companies. |
| (3) | Includes income tax, tax on assets and employee profit sharing. |
| (4) | The net income (after changes in accounting principles) per Series B Share and per Series D Share was calculated in accordance with Bulletin B-14 of Mexican GAAP, which is similar to SFAS No. 128 of U.S. GAAP. The following table presents the calculations of the weighted average number of shares and income per share allocation: |
| Series B Shares | Series D Shares | |||
| Number of Shares |
Weighted Average |
Number of Shares |
Weighted Average | |
| At December 31, 1999 | 2,746,546,090 | 2,746,546,050 | 2,594,794,360 | 2,594,794,360 |
| Allocation of earnings | 45.85% | 54.15% | ||
| Repurchase of our shares in 2000 from October 29, 2000 | ||||
| to December 29, 2000 | 6,750,000 | 736,246 | 27,000,000 | 2,944,984 |
| At December 31, 2000 | 2,739,796,090 | 2,745,809,844 | 2,567,794,360 | 2,591,849,376 |
| Allocation of earnings | 45.85% | 54.15% | ||
| Repurchase of our shares in 2001 from | ||||
| January 4, 2001 to January 16, 2001 | 2,056,000 | 2,004,647 | 8,224,000 | 8,018,586 |
| At December 31, 2001 | 2,737,740,090 | 2,737,791,443 | 2,559,570,360 | 2,559,775,774 |
| Allocation of earnings | 46.11% | 53.89% | ||
| At December 31, 2002 and 2003 | 2,737,740,090 | 2,737,740,090 | 2,559,570,360 | 2,559,570,360 |
| Allocation of earnings | 46.11% | 53.89% | ||
| (5) | Includes long-term bank loans minus the current portion of long-term debt. |
| (6) | Includes bottle breakage. |
| (7) | Includes investments in property, plant and equipment and deferred charges. |
| (8) | Operating margin is calculated by dividing income from operations by total revenues. |
Dividends
Subject to extraordinary economic events and to the factors described below that affect our financial situation and liquidity, which may affect whether or not dividends are declared and the amount of such dividends, we intend to pay aggregate dividends of approximately 15% to 30% of net income. 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, there can be no assurance that we will pay dividends or as to the amount of any dividends.
Subject to certain exceptions contained in the Deposit Agreement dated February 11, 2004, among FEMSA, The Bank of New York as depositary and all holders and beneficial owners from time to time of American Depositary Shares or ADSs evidenced by American Depositary Receipts issued under the Deposit Agreement, any dividends distributed to U.S. 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, exchange rate fluctuations may affect the U.S. dollar amount actually received by holders of our ADSs. Although the Mexican government does not currently restrict the ability of Mexican and foreign persons or entities to convert Mexican pesos to U.S. dollars or other currencies or to transfer other currencies out of Mexico, we cannot give any assurance that the Mexican government will not institute a restrictive exchange control policy in the future. Any restrictive exchange control policy could affect the ADS depositary’s ability to convert dividends received in Mexican pesos into U.S. dollars for purposes of making a distribution to holders of the ADSs.
The table below sets forth for each year the nominal amount of dividends per share that we declared in Mexican pesos and the U.S. dollar equivalent amounts that were actually paid on each of the respective payment dates for the period 2000 to 2004:
| Dividends by FEMSA–2000 to 2004 | ||||||
| Date Dividend Paid |
Fiscal Year with Respect to which Dividend was Declared |
Aggregate Amount of Dividend Declared (Nominal Pesos)(1) |
Per Series B Share Dividend (Nominal Pesos) | Per Series B Share Dividend (US$)(2) | Per Series D Share Dividend (Nominal Pesos) | Per Series D Share Dividend (US$)(2) |
| July 31, 2000 | 1999 | Ps. 503,163,279 | Ps. 0.0840 | $0.0090 | Ps. 0.105000 | $0.0112 |
| May 21, 2001 | 2000 | Ps. 435,790,703 | Ps. 0.0734 | $0.0082 | Ps. 0.091700 | $0.0103 |
| May 31, 2002 | 2001 | Ps. 664,966,740 | Ps. 0.1120 | $0.0116 | Ps. 0.140000 | $0.0145 |
| May 30, 2003 | 2002 | Ps. 397,792,604 | Ps. 0.0670 | $0.0065 | Ps. 0.083750 | $0.0081 |
| March 11, 2004(3) | 2003(4) | Ps. 531,379,672 | Ps. 0.0895 | –– | Ps. 0.111875 | –– |
| __________________ | |
| (1) | The aggregate amount of dividend declared is determined by the per series dividend amount multiplied by the number of shares outstanding at the date the dividend is declared: |
| Date Dividend Paid | Outstanding Shares | |||
| Series B | Series D | |||
| July 31, 2000 | 2,746,546,090 | 2,594,794,360 | ||
| May 21, 2001 | 2,737,740,090 | 2,559,570,360 | ||
| May 31, 2002 | 2,737,740,090 | 2,559,570,360 | ||
| May 30, 2003 | 2,737,740,090 | 2,559,570,360 | ||
| March 11, 2004(3) | 2,737,740,090 | 2,559,570,360 | ||
| __________________ | |
| (2) | Translated to U.S. dollars at the corresponding noon buying rate of the Federal Reserve Bank of New York. |
| (3) | Date of dividend declaration. |
| (4) | Because dividends for 2003 have not been paid at the time of this annual report, the U.S. dollar per share amount has not been determined. |
Exchange Rate Information-Mexican Peso
After a volatile 1997 and 1998, the Mexican peso remained relatively stable through 1999, 2000 and most of 2001. Towards the end of 2001 and the beginning of 2002, the Mexican peso appreciated considerably against the U.S. dollar and even more so against other currencies. The value of the Mexican peso peaked in March 2002 at Ps. 9.00 per U.S. dollar. From the second quarter of 2002 through the end of 2003, the peso depreciated reaching an exchange rate of Ps. 11.24 per U.S. dollar in December of 2003. The peso has appreciated slightly in 2004 to date. There can be no assurance that the Mexican government and the Bank of Mexico will maintain their current policies with regard to the Mexican peso or that the Mexican peso will not further depreciate significantly.
The noon buying rate per U.S. dollar on March 15, 2004 was Ps. 10.975. The following table sets forth, for the periods indicated, the high, low, average and period-end noon buying rates of the Federal Reserve Bank of New York, expressed in Mexican pesos per U.S. dollar. We calculated the average rate by using the average of the exchange rates on the last day of each month during the period. The rates have not been restated in constant currency units. All amounts are stated in Mexican pesos.
| Exchange Rate |
||||
| High | Low | Average | Period | |
| 1999 | 10.60 | 9.24 | 9.56 | 9.48 |
| 2000 | 10.09 | 9.18 | 9.47 | 9.62 |
| 2001 | 9.97 | 8.95 | 9.34 | 9.16 |
| 2002 | 10.43 | 9.00 | 9.66 | 10.43 |
| 2003 | 11.41 | 10.11 | 10.79 | 11.24 |
| High | Low | Average | Period | |
| 2003: | ||||
| September | 11.04 | 10.77 | 10.92 | 11.00 |
| October | 11.32 | 10.97 | 11.18 | 11.08 |
| November | 11.40 | 10.98 | 11.15 | 11.40 |
| December | 11.41 | 11.17 | 11.25 | 11.24 |
| 2004: | ||||
| January | 11.10 | 10.81 | 10.92 | 11.01 |
| February | 11.25 | 10.91 | 11.03 | 11.06 |
| March 1 to March 15 | 11.05 | 10.92 | 10.97 | 10.98 |
Risk Factors
Risks Related to Our Company
Coca-Cola FEMSA
Coca-Cola FEMSA’s business depends on its relationship with The Coca-Cola Company.
Approximately 93.2% of Coca-Cola FEMSA’s sales volumes in 2003 were derived from sales of Coca-Cola trademark beverages. Coca-Cola FEMSA produces, markets and distributes Coca-Cola trademark beverages through standard bottler agreements that cover all of Coca-Cola FEMSA’s present territories. Through its rights under the bottler agreements and as a large shareholder, The Coca-Cola Company has the ability to exercise substantial influence over the conduct of Coca-Cola FEMSA’s business. See “Item 10. Additional Information—Material Contracts—Coca-Cola FEMSA—Bottler Agreements.”
Under Coca-Cola FEMSA’s bottler agreements, The Coca-Cola Company may unilaterally set the price for its concentrate. Furthermore, in conjunction with The Coca-Cola Company, Coca-Cola FEMSA prepares a three-year general business plan that is submitted to Coca-Cola FEMSA’s board of directors for approval. The Coca-Cola Company may require that Coca-Cola FEMSA demonstrates its financial ability to meet Coca-Cola FEMSA’s plans and may terminate Coca-Cola FEMSA’s rights to produce, market and distribute soft drinks in territories with respect to which such approval is withheld. The Coca-Cola Company also makes significant contributions to Coca-Cola FEMSA’s marketing budget although they are not required to contribute a particular amount. In addition, Coca-Cola FEMSA is prohibited from bottling any soft drink product or distributing other beverages without The Coca-Cola Company’s authority or consent. The Coca-Cola Company has the exclusive right to import and export Coca-Cola trademark beverages to and from Coca-Cola FEMSA’s territories. Coca-Cola FEMSA may not transfer control of the bottler rights of any of its territories without the consent of The Coca-Cola Company.
Coca-Cola FEMSA depends on The Coca-Cola Company to renew its bottler agreements. Coca-Cola FEMSA’s bottler agreements for Mexico expire in 2005 and 2013, renewable in each case for ten-year terms. Its bottler agreements for Colombia, Brazil and Argentina expire in 2004, renewable in each case for five-year terms (except for Argentina, which is renewable for ten-year terms). Coca-Cola FEMSA’s remaining territories are governed by bottler agreements that expire after 2005 that have similar renewal periods. There can be no assurances that The Coca-Cola Company will decide to renew any of these agreements. In addition, these agreements generally may be terminated in the event that Coca-Cola FEMSA fails to comply with their terms. Non-renewal or 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, prospects, and results of operations.
The Coca-Cola Company indirectly owns 39.6% of Coca-Cola FEMSA’s outstanding capital stock, representing 46.4% of the voting rights in Coca-Cola FEMSA. The Coca-Cola Company is entitled to appoint four of Coca-Cola FEMSA’s 18 directors and certain of Coca-Cola FEMSA’s executive officers and, except under limited circumstances, has the power to veto significant decisions of Coca-Cola FEMSA’s board of directors. Thus, the Coca-Cola Company has the power to affect the outcome of all actions requiring approval by Coca-Cola FEMSA’s board of directors and, except in certain limited situations, has the power to affect the outcome of all actions requiring approval of Coca-Cola FEMSA’s shareholders. See “Item 10. Additional Information—Material Contracts—Coca-Cola FEMSA—Shareholders Agreement.” The interests of the Coca-Cola Company may be different from the interests of Coca-Cola FEMSA’s remaining shareholders, and they may cause Coca-Cola FEMSA to take actions that are not in the interest of Coca-Cola FEMSA’s remaining shareholders.
Coca-Cola FEMSA has significant transactions with affiliates, particularly The Coca-Cola Company, that create potential conflicts of interest.
Coca-Cola FEMSA engages in transactions with subsidiaries of The Coca-Cola Company. Coca-Cola FEMSA has entered into cooperative marketing arrangements with The Coca-Cola Company. Coca-Cola FEMSA is a party to a number of bottler agreements with The Coca Cola Company and has also entered into a credit agreement with The Coca-Cola Company pursuant to which Coca-Cola FEMSA may borrow up to US$250 million for working capital and other general corporate purposes. See “Item 7. Major Shareholders and Related Party Transactions—Related Party Transactions” and “Item 10. Additional Information—Material Contracts—Coca-Cola FEMSA—Bottler Agreements.” Transactions with affiliates may create the potential for conflicts of interest, which could result in terms less favorable to Coca-Cola FEMSA than could be obtained from an unaffiliated third party.
Coca-Cola FEMSA has recently increased its leverage as a result of the Panamco acquisition.
In connection with the acquisition of Panamco, Coca-Cola FEMSA incurred approximately Ps. 26,352 million of debt (including existing debt of Panamco). Coca-Cola FEMSA’s total indebtedness as of December 31, 2003 was Ps. 29,004 million. Its debt level is now significantly higher than it has been historically. The increase in debt may reduce the amount of cash otherwise available to Coca-Cola FEMSA to invest in its business or meet its obligations and may prevent it in the future from pursuing acquisitions and other opportunities that may present themselves to Coca-Cola FEMSA or from obtaining additional financing or completing refinancings on terms favorable to Coca-Cola FEMSA.
Coca-Cola FEMSA may not achieve expected operating efficiencies in the newly acquired territories.
Through the acquisition of Panamco, Coca-Cola FEMSA acquired new territories in Mexico as well as in the following countries in which it has not historically conducted operations: Guatemala, Nicaragua, Costa Rica, Panama, Colombia, Venezuela and Brazil. Since the acquisition, Coca-Cola FEMSA has undertaken a plan in the newly acquired territories to integrate Coca-Cola FEMSA’s operations, to improve the utilization of assets across Coca-Cola FEMSA’s territories and to implement the commercial strategies that Coca-Cola FEMSA has historically applied in its territories in Mexico and Argentina. Conditions in these new territories are different from the conditions under which Coca-Cola FEMSA has historically operated with less favorable consumption patterns than those experienced in Mexico and different and more challenging political and economic climates. In addition, distribution and marketing practices in Coca-Cola FEMSA’s new territories differ from Coca-Cola FEMSA’s historical practices. Several of these territories have a lower level of pre-sale as a percentage of total distribution than Coca-Cola FEMSA is accustomed to having, and the product and presentation mix varies from territory to territory with customer preferences. There can be no assurance that Coca-Cola FEMSA’s initiatives will reduce operating costs or maintain or improve sales in the near term or at all, which may adversely affect Coca-Cola FEMSA’s sales growth and operating margins.
Competition could affect Coca-Cola FEMSA’s business.
The beverage industry throughout Latin America is highly competitive. Coca-Cola FEMSA faces competition from other bottlers of soft drinks such as PepsiCo, Inc., which we refer to as PepsiCo, and from producers of low cost beverages or “B” brands. Coca-Cola FEMSA also competes against beverages other than soft drinks such as water, fruit juice and sport drinks. Although competitive conditions are different in each of Coca-Cola FEMSA’s territories, Coca-Cola FEMSA competes principally in terms of price, packaging, consumer sale promotions, customer service and non-price retail incentives. 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 results of operations.
Coca-Cola FEMSA’s principal competitor in Mexico is The Pepsi Bottling Group, which we refer to as PBG. PBG is the largest Pepsi bottler worldwide and competes with Coca-Cola trademark beverages. Coca-Cola FEMSA has also experienced stronger competition in Mexico from lower priced soft drinks in multi-serving presentations. In Argentina and Brazil, Coca-Cola FEMSA competes against Companhia de Bebidas das Americas, commonly referred to as AmBev, the largest brewer in Latin America, which sells Pepsi products, in addition to a portfolio that includes local brands with flavors such as guaraná and proprietary beers. In each of Coca-Cola FEMSA’s territories it competes against bottlers of Pepsi with various other bottlers and distributors of national and regional soft drinks as well as complementary beverages such as water, juice and sports drinks. In certain territories, Coca-Cola FEMSA also competes against soft drink flavors that have a strong local presence, such as La Colombiana in Colombia.
A water shortage or a failure to maintain existing concessions could affect Coca-Cola FEMSA’s business.
Water is an essential component of soft drinks. Coca-Cola FEMSA obtains water from various sources in its territories, including springs, wells, rivers and municipal water companies. In Mexico, Coca-Cola FEMSA purchases water from municipal water companies and pumps water from its own wells pursuant to concessions granted by the Mexican government. Coca-Cola FEMSA obtains the vast majority of the water used in its soft drink production in Mexico pursuant to these concessions, which the Mexican government granted based on studies of the existing and projected groundwater supply. Coca-Cola FEMSA’s existing water concessions in Mexico may be terminated by governmental authorities under certain circumstances and their renewal depends on receiving necessary authorizations from municipal water authorities. See “Item 4. Information on the Company—Regulatory Matters—Water Supply Law.” In Coca-Cola FEMSA’s other territories, its existing water supply may not be sufficient to meet its future production needs and the available water supply may be adversely affected by shortage or changes in governmental regulations.
Coca-Cola FEMSA cannot assure that water will be available in sufficient quantities to meet its future production needs, or that its concessions and permits will not be terminated or prove sufficient to meet its water supply needs.
Increases in the prices of raw materials may increase Coca-Cola FEMSA’s cost of sales and may affect its results of operations.
Coca-Cola FEMSA’s most significant raw materials are concentrate, which it acquires from companies designated by The Coca-Cola Company, sweeteners and packaging materials. Prices for concentrate are determined by The Coca-Cola Company pursuant to its bottler agreements as a percentage of the weighted average retail price, net of applicable taxes. The prices for 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 use only suppliers approved by The Coca-Cola Company, which may limit the number of suppliers available to Coca-Cola FEMSA. Coca-Cola FEMSA’s sales prices are denominated in the local currency in which it operates, while the prices of certain materials used in the bottling of its products, mainly aluminum cans and plastic bottles, 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 any country in which it operates, particularly against the Mexican peso. See “Item 4. Information on the Company—Coca-Cola FEMSA—Raw Materials.”
After concentrate, packaging, and sweeteners constitute the largest portion of Coca-Cola FEMSA’s raw material costs. 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 Mexico, sugar prices increased approximately 8% in 2003, and Coca-Cola FEMSA’s ability to substitute other sweeteners has been limited by the imposition of a 20% excise tax on carbonated soft drinks produced with non-sugar sweeteners. In Venezuela, there was a shortage of sugar during the second half of 2003 due to the inability of the main sugar importers to access foreign currencies as a result of the exchange controls implemented at the beginning of 2003.
Coca-Cola FEMSA cannot assure that its raw material prices will not increase in the future. Increases in the prices of raw materials will increase Coca-Cola FEMSA’s cost of sales and adversely affect its results of operations.
Taxes on soft drinks could affect Coca-Cola FEMSA’s business.
Coca-Cola FEMSA’s products are subject to excise and value-added taxes in many of the countries in which it operates. The imposition of new taxes or increases in taxes on Coca-Cola FEMSA’s products may have a material adverse effect on its business, prospects, financial conditions and results of operations. Mexico recently implemented a 20% excise tax on carbonated soft drinks produced with non-sugar sweeteners. Certain countries in Central America, Argentina and Brazil have also imposed taxes on Coca-Cola FEMSA’s products. See “Item 4. Information on the Company—Coca-Cola FEMSA—Taxation of Soft Drinks.” Coca-Cola FEMSA can give no assurance that any governmental authority in any country where it operates will not impose or increase any such taxes in the future.
Regulatory developments may have an affect on 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 environment, labor, taxes and antitrust. The adoption of new laws or regulations in the countries in which Coca-Cola FEMSA operates may increase its operating costs or impose restrictions on its operations. In particular, environmental standards became more stringent recently in several of the countries in which Coca-Cola FEMSA operates, and Coca-Cola FEMSA is in the process of complying with these new standards.
Voluntary price restraints or statutory price controls have been imposed historically in several of the countries in which Coca-Cola FEMSA operates. The imposition of these restrictions may have an adverse effect on its results of operations and financial position. Although Mexican bottlers have been free to set prices for carbonated soft drinks without governmental intervention since January 1996, such prices were once subject to statutory price controls and, later, to voluntary price restraints, which effectively limited Coca-Cola FEMSA’s ability to increase prices in the Mexican market without governmental consent. See “Item 4. Information on the Company—Regulatory Matters—Price Controls on Soft Drinks.” Coca-Cola FEMSA can give no assurance that governmental authorities in any country where Coca-Cola FEMSA operates will not impose voluntary price restraints or statutory price controls.
FEMSA Cerveza
Unfavorable economic conditions in Mexico and the United States may affect FEMSA Cerveza’s business.
Demand for the products of FEMSA Cerveza, S.A. de C.V., which we refer to as FEMSA Cerveza, our 70%-owned subsidiary engaged in the production, distribution and marketing of beer, may be affected by economic conditions in Mexico and the United States. In particular, demand in our northern stronghold regions in Mexico, where there are a large number of border towns, may be more affected by the performance of the United States’ economy. In addition, our exports to the United States may be affected by reduced demand from the United States or from a reduction in prices by our competitors. Any depreciation of the Mexican peso may negatively affect our results of operations because a significant portion of our costs and expenses are denominated in or determined by reference to the U.S. dollar.
Uncertainty in commodity prices of raw materials used in beer production may result in increased costs.
FEMSA Cerveza purchases a number of commodities for the production of its products (principally barley, malt and hops) from Mexican producers and in the international market. The prices of such commodities can fluctuate and are determined by global supply and demand and other factors, including changes in exchange rates, over which FEMSA Cerveza has no control. There can be no assurance that FEMSA Cerveza will be able to recover increases in the cost of raw materials. See “Item 4. Information on the Company—FEMSA Cerveza—Raw Materials.” An increase in raw materials costs would adversely affect our results of operations.
Labatt, through a joint venture with FEMSA Cerveza, has significant rights that may allow Labatt to influence the conduct of FEMSA Cerveza’s business.
On December 1, 1994, FEMSA Cerveza and Labatt Brewing Company Limited, which we refer to as Labatt, entered into a joint venture pursuant to which Labatt currently holds 30% of the capital stock of FEMSA Cerveza. Both parties agreed to combine their United States beer businesses through their joint ownership of Labatt USA LLC and Latrobe Brewing Company LLC, which we collectively refer to as Labatt USA. FEMSA Cerveza’s relationship with Labatt gives Labatt significant rights, which may allow Labatt to influence the conduct of FEMSA Cerveza’s business. Under the bylaws of FEMSA Cerveza, Labatt may appoint four directors to FEMSA Cerveza’s 15 member board of directors. As long as Labatt or its controlled affiliates or permitted transferees hold certain shares of FEMSA Cerveza representing at least 20% of the outstanding capital stock, Labatt has the right to approve the appointment of the senior operating vice presidents of FEMSA Cerveza and veto certain decisions of the board of directors.
In addition, affiliates of Labatt own 70% of Labatt USA, and Labatt USA is the exclusive importer of FEMSA Cerveza’s brands into the United States. As such, FEMSA Cerveza’s exports to the United States may depend on Labatt. See “Item 10. Additional Information—Material Contracts—FEMSA Cerveza.”
On April 29, 2002, Wisdom Import Sales Co., which we refer to as Wisdom, a subsidiary of FEMSA Cerveza in the United States, filed a lawsuit against certain affiliates of Labatt to enjoin the integration of the beer brands of Beck’s North America, which we refer to as Beck’s, into the beer distribution portfolio of Labatt USA, and on May 23, 2002 a preliminary injunction was issued by a New York district court preventing the integration of Beck’s into the Labatt USA portfolio. This ruling was upheld on appeal and on October 10, 2003, the district court entered a final judgment on consent, providing that the affiliates of Labatt are permanently prohibited from integrating the Beck’s brands into the portfolio of Labatt USA without the required approval of Wisdom or the Wisdom directors on the board of the limited liability company that governs Labatt USA.
On March 3, 2004, Interbrew and the Brazilian brewer AmBev announced a transaction that would affect the ownership of the majority interest in the limited liability company that owns Labatt USA. Wisdom has commenced litigation in the United States District Court for the Southern District of New York alleging, among other things, that the transaction involves a transfer of membership or other ownership interests in the limited liability company that owns Labatt USA, and that such a transfer cannot occur without the approval of Wisdom or at least one of the Wisdom-appointed directors on the board of the limited liability company. See “Item 8. Financial Information––Legal Proceedings––FEMSA Cerveza.” An ongoing dispute between FEMSA Cerveza and Labatt may have an adverse effect on our existing joint venture and our exports in the United States.
FEMSA Cerveza’s sales in the Mexican market depend on its ability to compete with Grupo Modelo.
FEMSA Cerveza faces competition in the Mexican beer market from Grupo Modelo, S.A. de C.V., which we refer to as Grupo Modelo. FEMSA Cerveza’s ability to compete successfully in the Mexican beer market will have a significant impact on its Mexican sales. See “Item 4. Information on the Company––FEMSA Cerveza––The Mexican Beer Market.”
Competition from imports in the Mexican beer market is increasing.
Imports do not currently constitute a significant portion of the Mexican beer market. Under the North American Free Trade Agreement or NAFTA, the tariffs applicable to imported beers from the United States and Canada were eliminated in January 2001. During 2003 imports grew 10.6% versus 2002 and represented 1.8% of the Mexican beer market. FEMSA Cerveza believes that imports will continue to represent a small percentage of the Mexican beer market. Increased import competition, however, could lead to greater competition in general, and there can be no assurance that such a trend would not affect FEMSA Cerveza. See “Item 4. Information on the Company—FEMSA Cerveza––The Mexican Beer Market.”
Regulatory developments in Mexico could affect FEMSA Cerveza’s business.
FEMSA Cerveza’s business is subject to a variety of different Mexican government regulations, both federal and local, and may be affected by changes in law, regulation or regulatory policy. Actions of Mexican federal and local authorities, in particular changes in governmental policy with respect to excise and value-added tax laws, cold beer regulation or the beer industry practice of “tied-customer arrangements,” which are agreements with retailers to sell and promote its products, may have a material adverse impact on FEMSA Cerveza’s business, financial conditions and results of operations.
Federal regulation of beer consumption in Mexico is primarily effected through a 25% excise tax and a 15% value-added tax. We do not anticipate an increase in these taxes, but federal regulation relating to excise taxes may change in the future, resulting in an increase or decrease in the tax. Local regulations are primarily effected through the issuance of licenses, which authorize retailers to sell alcoholic beverages. Other regulations affecting beer consumption in Mexico vary according to local jurisdictions and include limitations on the hours during which restaurants, bars and other retail outlets are allowed to sell beer. See “Item 4. Information on the Company—FEMSA Cerveza—The Mexican Beer Market.”
A water supply shortage could affect FEMSA Cerveza’s business.
FEMSA Cerveza purchases water from government entities and obtains pump water from its own wells pursuant to concessions granted by the Mexican government.
FEMSA Cerveza believes that its water concessions will satisfy its current and future water requirements. There can be no assurance, however, that isolated periods of adverse weather will not affect FEMSA Cerveza’s supply of water to meet its future production needs in any given period, or that its concessions will not be terminated or will not be renewed by the Mexican government or prove insufficient to meet its water demand.
FEMSA Comercio
Competition from other retailers in Mexico could affect our company’s business.
The Mexican retail sector is highly competitive. FEMSA participates in the retail sector primarily through FEMSA Comercio, S.A. de C.V., which we refer to as FEMSA Comercio. FEMSA Comercio’s Oxxo convenience stores face competition on a regional basis from 7-Eleven, Super Extra, AM/PM and Circle K stores. In particular, the Super Extra chain is owned and managed by Grupo Modelo, our main competitor in the Mexican beer market, and in 2003 the Super Extra chain launched an aggressive expansion in the number of their stores. Oxxo convenience stores also face competition from numerous small chains of retailers in some regions across Mexico. There can be no assurance that FEMSA Comercio will not be affected by an increase in competition.
Oxxo convenience stores are sensitive to economic conditions in Mexico.
Due to the nature of the convenience store market, convenience stores often sell certain products at a premium. The convenience store market is thus highly sensitive to economic conditions as 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 our 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 operating revenue.
FEMSA Empaques
FEMSA Empaques’ beverage can operation is sensitive to economic conditions and competition from alternative beverage presentations.
The aluminum can operations of Fábricas Monterrey, S.A. de C.V., which we refer to as Famosa, a subsidiary of FEMSA Empaques, S.A. de C.V., which we refer to as FEMSA Empaques, are sensitive to economic conditions because beverage can presentations are more expensive to the consumer than alternative presentations. FEMSA Empaques’ beverage can business exclusively serves the beverage industry and therefore is vulnerable to shifts in demand for beverage products. Furthermore, beverage can presentations also compete with alternative beverage presentations such as glass and polyethylene terephtalate or PET presentations. Demand for canned beverages has decreased in recent years due to a shift toward PET presentations in the soft drink industry. See “Item 4. Information on the Company—FEMSA Empaques—Principal Products—Beverage Cans.” A decrease in demand may adversely affect FEMSA Empaques’ results of operations.
The Mexican beverage can industry may have excess capacity, which may result in decreases in prices.
Certain significant competitors in the beverage can industry operate at average levels of capacity utilization below 60%. We cannot guarantee that some of these businesses will not practice aggressive pricing strategies in order to increase their sales volume. See “Item 4. Information on the Company—FEMSA Empaques—Principal Products—Beverage Cans.”
FEMSA Empaques’ sales of glass bottles may be affected by competition and from alternative beverage presentations.
FEMSA Empaques’ principal domestic competitor in the sale of glass bottles is Vitro, S.A. de C.V., which we refer to as Vitro. There can be no assurance that FEMSA Empaques will not be affected by price competition from Vitro or other producers of glass bottles or alternative containers. See “Item 4. Information on the Company—FEMSA Empaques—Principal Products—Glass Bottles.”
Moreover, like the beverage can business, FEMSA Empaques’ glass bottle business exclusively serves the beverage industry and, thus, is vulnerable to shifts in preferences for those products and presentations. Demand for glass bottle presentations has declined in recent years due to a shift towards non-returnable PET presentations for soft drinks. See “Item 4. Information on the Company—FEMSA Empaques—Principal Products—Glass Bottles.” There can be no assurance that there will not be a further shift in demand towards such alternative presentations, which would have an effect on our glass bottle operations.
FEMSA Empaques’ operating expenses are affected by changes in commodity prices and exchange rate fluctuations.
A significant portion of FEMSA Empaques’ raw materials consist of commodities, the prices of which are subject to volatility in accordance with international market conditions. In addition, FEMSA Empaques’ operating expenses are denominated in Mexican pesos while its revenues are linked to the U.S. dollar. As a result, the operating margins of FEMSA Empaques may be adversely affected as a result of increases in commodity prices or an appreciation in the Mexican peso against the U.S. dollar.
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.
A voting trust, comprised mainly of five families, owns 36.01% of our capital stock and 69.67% 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 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 changes in our corporate form, a dissolution or liquidation and the cancellation of the registration of the Series D-B and D-L Shares. 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 in the form of ADSs under the trading symbol FMX. There can be no assurance that holders of our shares through 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 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 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, we must generally 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. We may not be legally permitted to allow holders of our shares in the form of ADSs in the United States to exercise any preemptive rights in any future capital increases unless (i) we file a registration statement with the SEC with respect to that future issuance of shares or (ii) 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.
There can be no assurance that we will file a registration statement with the SEC to allow holders of our shares in the form of ADSs 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 through ADSs is not possible. As a result, the equity interest of holders of our shares through ADSs would be diluted proportionately. See “Item 10. Additional Information—Preemptive Rights.”
Risks Related to Mexico and the Other Countries in Which We Operate
Adverse economic conditions in Mexico may affect our financial condition and results of operations.
We are a Mexican corporation, and our Mexican operations are our single most important geographic division. In the past, Mexico has experienced both prolonged periods of weak economic conditions and dramatic deteriorations in economic conditions that have had a negative impact on our company. There can be no assurances that such conditions will not return or that such conditions will not have a material adverse effect on our financial condition and results of operations.
Our business may be significantly affected by the general condition of the Mexican economy, the rate of inflation, interest rates and exchange rates. Decreases in the growth rate of the Mexican economy, periods of negative growth and increases in inflation or interest rates may result in lower demand for our products, lower real pricing or a shift to lower margin products. Because a large percentage of our costs are fixed costs, we may not be able to reduce costs and expenses, 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, Mexican peso-denominated funding and have an adverse effect on our financial condition and results of operations.
Depreciation of the Mexican peso relative to the U.S. dollar could affect our financial condition and results of operations.
A depreciation of the Mexican peso relative to the U.S. dollar would increase the cost to us of a portion of the raw materials, the price of which is tied to the U.S. dollar, and debt obligations denominated in U.S. dollars, and thereby may have a negative effect on our net results. A severe devaluation or depreciation of the Mexican peso may also 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 indebtedness. While the Mexican government does not currently restrict, and for many years 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. To the extent that there are currency fluctuations, they are likely to have an effect on our financial condition, results of operations and cash flows in future periods.
Political events in Mexico could affect our operations.
Mexican political events may also significantly affect our operations. In the Mexican national elections held on July 2, 2000, Vicente Fox of the National Action Party (Partido Acción Nacional) or PAN won the presidency. Although his victory ended more than 70 years of presidential rule by the Institutional Revolutionary Party (Partido Revolucionario Institucional) or PRI, neither the PRI nor the PAN succeeded in securing a majority in the Mexican congress. In elections in 2003, the PAN lost additional seats in the Mexican congress and state governorships. The resulting legislative gridlock has impeded the progress of reforms in Mexico, which may adversely affect economic conditions in Mexico or our results of operations. During 2004, there will be elections for governors in 10 out of 32 states and for local congresses in 14 states.
Developments in other Latin American countries in which we operate may affect our business.
In addition to Mexico, our subsidiary Coca-Cola FEMSA conducts operations in Guatemala, Nicaragua, Costa Rica, Panama, Colombia, Venezuela, Brazil and Argentina. These countries expose us to different or greater country risk than Mexico. For many of these countries, operating results in recent years have been adversely affected by deteriorating macroeconomic and political conditions. In Argentina and Venezuela, significant economic and political instability, including a contracting economy, a drastic currency devaluation, high unemployment, the introduction of exchange controls and social unrest have resulted in higher production costs and declining net sales for Coca-Cola FEMSA. In Colombia, Coca-Cola FEMSA has experienced problems with production and distribution as a result of political instability.
Coca-Cola FEMSA’s future results may be significantly affected by the general economic and financial conditions in the countries where it operates, by the devaluation of the local currency, inflation and high interest rates, or by political developments or changes in law. Devaluation of the local currency against the U.S. dollar may increase the operating costs in that country, and a depreciation against the Mexican peso may negatively affect the results of that country as reported in our Mexican GAAP financial statements. In addition, some of these countries may impose exchange controls that could impact Coca-Cola FEMSA’s ability to purchase raw materials in foreign currencies and the ability of the subsidiaries in these countries to remit dividends abroad or make payments other than in local currencies, as is currently the case in Venezuela under regulations imposed in January 2003. As a result of these potential risks, Coca-Cola FEMSA may experience lower demand, lower real pricing, or increases in costs, which may negatively impact its results of operations.
ITEM 4. INFORMATION ON THE COMPANY
Overview
We are a Mexican company headquartered in Monterrey, Mexico. Our legal name is Fomento Económico Mexicano, S.A. 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 a sociedad anónima de capital variable under the laws of Mexico. Our company was incorporated on May 30, 1936 and has a duration of 99 years.
We conduct our operations through the following principal holding companies, each of which we refer to as a subholding company:
- Coca-Cola FEMSA, which engages in the production, distribution and marketing of soft drinks;
- FEMSA Cerveza, which engages in the production, distribution and marketing of beer;
- FEMSA Comercio, which operates convenience stores; and
- FEMSA Empaques, which engages in the production and distribution of beverage-related packaging materials.
Corporate Background
FEMSA traces its origins to the establishment of Mexico’s first brewery, Cervecería Cuauhtémoc, S.A. de C.V., 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. The company is controlled by descendants of certain of the founders of Cuauhtémoc.
In 1891, the first year of production, Cuauhtémoc produced 2,000 hectoliters of beer. Cuauhtémoc continued to expand through additions to existing plant capacity and through acquisitions of other Mexican breweries, and has continued to increase its production capacity, reaching approximately 32.5 million hectoliters in 2003.
The strategic integration of the company dates back to 1936 when Famosa was established to supply crown caps to the brewery. The packaging operations were expanded in 1957 when we began to produce labels and flexible packaging for the company’s beer operations. 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. (later Grupo Industrial Alfa, S.A. de C.V.), controlled by the Garza Sada family, and the beverage and banking operations were consolidated under the FEMSA corporate umbrella, controlled by the Garza Lagüera family. FEMSA’s shares were first listed on the Mexican Stock Exchange on September 19, 1978. Between 1977 and 1981, FEMSA diversified its operations through acquisitions in the soft drink and mineral water industries, the establishment of the first convenience stores under the trade name Oxxo and investments in the hotel, construction, auto parts, food and fishing industries, which 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.
Pursuant to the 1988 restructuring, these different assets were combined under a single corporate, which became Grupo Industrial Emprex, S.A. de C.V., which we refer to as Emprex. The debt restructuring included a capital increase, capitalization of debt and a divestiture of interests in non-core businesses. As a result of these transactions, FEMSA’s interest in Emprex was diluted to 60%, only to increase subsequently to approximately 68% as a result of the exercise of certain option rights by FEMSA.
In August 1991, FEMSA repurchased approximately 30% of its shares from a dissident minority shareholder. 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. As a result, FEMSA’s interest in Emprex declined to approximately 62%. In connection with these transactions, an 11% interest in Emprex was issued to a European portfolio investor. This reduced FEMSA’s interest in Emprex to approximately 51%. 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, Emprex began a series of strategic transactions to strengthen the competitive positions of its 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, and the sale of a 22% strategic interest in FEMSA Cerveza to Labatt in 1994. Labatt subsequently increased its interest in FEMSA Cerveza to 30%.
In 1998, we completed a reorganization that:
simplified 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 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 New York Stock Exchange representing BD Units, and listed the BD Units and the B Units on the Mexican Stock Exchange. Prior to the completion of the exchange offer, FEMSA owned 51.04% of the shares of Emprex. Upon the completion of the exchange offer, FEMSA owned 98.70% of the outstanding shares of Emprex, which amount increased to 99.99% through a tender offer by FEMSA for the remaining Emprex shares.
In July 2002, as a result of the split-up or escisión of Emprex, Compañía Internacional de Bebidas, S.A. de C.V., which we refer to as CIBSA, was created as a new company to hold our interest in Coca-Cola FEMSA.
In May 2003, our subsidiary Coca-Cola FEMSA expanded its operations throughout Latin America by acquiring 100% of 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 distributing Coca-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 total cost of the acquisition was Ps. 29,518 million and was financed with new debt, an equity contribution by FEMSA, an exchange of The Coca-Cola Company’s equity interests in Panamco and available cash. Shareholders of Panamco, other than The Coca-Cola Company and its subsidiaries, received cash in exchange for their shares. The Coca-Cola Company and its subsidiaries received Series D Shares in exchange for their equity interest in Panamco of approximately 25%. After the Panamco acquisition, FEMSA indirectly owns 45.7% of the capital stock of Coca-Cola FEMSA (53.6% of its capital stock with full voting rights) and The Coca-Cola Company indirectly owns 39.6% of the capital stock of Coca-Cola FEMSA (46.4% of its capital stock with full voting rights). The remaining 14.7% of its capital stock trades on the Mexican Stock Exchange and on the New York Stock Exchange in the form of ADSs under the trading symbol KOF.
Ownership Structure
We conduct our business through our subholding companies as shown in the following diagram and table:
Subholding
Companies--Ownership Structure
As of March 15, 2004
(1) Percentage of capital stock, equal to 53.6% of capital stock with full voting rights.
Subholding Companies—Overview
| Coca-Cola | FEMSA | FEMSA | FEMSA | |
| FEMSA | Cerveza | Comercio | Empaques | |
| Industry | Soft.Drinks | Beer | Retail | Packaging |
| Strategic | The Coca-Cola | |||
| Partner | Company | Labatt | None | None |
Operations by Segment—Overview
Year Ended December 31, 2003(1)
| Coca-Cola | FEMSA | FEMSA | FEMSA | |||||
| FEMSA | Cerveza | Comercio | Empaques | |||||
| Pesos | % | Pesos | % | Pesos | % | Pesos | % | |
| Total Revenues | 35,729 | 47.08 | 21,924 | 28.89 | 16,601 | 21.87 | 7,352 | 9.69 |
| Income from Operations.. | 6,710 | 55.39 | 3,586 | 29.60 | 694 | 5.73 | 988 | 8.16 |
| Total Assets | 61,420 | 58.87 | 28,936 | 27.73 | 6,137 | 5.88 | 7,168 | 6.87 |
| Employees | 56,841 | 65.99 | 16,461 | 19.11 | 5,859 | 6.80 | 4,197 | 4.87 |
| __________________ | |
| (1) | Expressed in millions of Mexican pesos, except for employees. 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, including corporate services. |
Total Revenues Summary by Segment(1)
| Year Ended December 31, | |||
| 2003 | 2002 | 2001 | |
| Coca-Cola FEMSA | 35,729 | 18,668 | 17,773 |
| FEMSA Cerveza | 21,924 | 21,642 | 21,529 |
| FEMSA Comercio | 16,601 | 13,247 | 11,160 |
| FEMSA Empaques | 7,352 | 6,862 | 6,840 |
| Other | 3,843 | 3,559 | 3,176 |
| Consolidated Total Revenues | 75,891 | 55,395 | 52,465 |
| __________________ | |
| (1) | Expressed in millions of Mexican pesos. The sum of the financial data for each segment differ from our consolidated financial information due to intercompany transactions, which are eliminated in consolidation. |
Total Revenues Summary by Geographic Location (1)
| Year Ended December 31, | |||
| 2003 | 2002 | 2001 | |
| Mexico | 64,185 | 53,571 | 50,477 |
| Argentina | 2,077 | 1,824 | 1,988 |
| Brazil | 2,797 | — | — |
| Venezuela | 2,544 | — | — |
| Colombia | 2,319 | — | — |
| Central America | 2,187 | — | — |
| Consolidated Total Revenues | 75,891 | 55,395 | 52,465 |
| __________________ | |
| (1) | Expressed in millions of Mexican pesos. The sum of the financial data for each territory differ from our consolidated financial information due to intercompany transactions, which are eliminated in consolidation. |
Significant Subsidiaries
The following table sets forth our significant subsidiaries as of the date of this annual report:
| Name of Company | Jurisdiction of Establishment |
Percentage Owned |
| CIBSA | Mexico | 100.0 |
| Coca-Cola FEMSA | Mexico | 45.7(1) |
| Corporación Interamericana de Bebidas, S.A. de C.V. (Panamco) | Mexico | 45.7 |
| Propimex, S.A. de C.V | Mexico | 45.7 |
| Panamco Bajío, S.A. de C.V | Mexico | 42.7 |
| Panamco México, S.A. de C.V | Mexico | 44.8 |
| Inmuebles del Golfo, S.A. de C.V | Mexico | 45.7 |
| Emprex | Mexico | 100.0 |
| FEMSA Cerveza | Mexico | 70.0 |
| Cervecería Cuauhtémoc Moctezuma, S.A. de C.V | Mexico | 70.0 |
| Cervezas Cuauhtémoc Moctezuma, S.A. de C.V | Mexico | 70.0 |
| FEMSA Comercio | Mexico | 100.0 |
| Cadena Comercial Oxxo, S.A. de C.V | Mexico | 100.0 |
| Oxxo Express, S.A. de C.V | Mexico | 100.0 |
| FEMSA Empaques | Mexico | 100.0 |
| Fábricas Monterrey, S.A. de C.V | Mexico | 100.0 |
| Sílices de Veracruz, S.A. de C.V | Mexico | 100.0 |
| Vendo de México, S.A. de C.V | Mexico | 100.0 |
| ______________________ | |
| (1) | Percentage of capital stock. FEMSA owns 53.6% of the capital stock with full voting rights. |
Business Strategy
We are a beverage company. Our soft drink operation, Coca-Cola FEMSA, is currently the second largest bottler of Coca-Cola products in the world, measured in terms of sales volumes in 2003, and our brewing operation, FEMSA Cerveza, is both a significant competitor in the Mexican beer market as well as a major exporter in key international markets including the United States. Coca-Cola FEMSA and FEMSA Cerveza are our core businesses, which together define our identity and are the main avenues of our future growth.
As a beverage company, 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. We strive to achieve this by developing superior brand equity, expanding our already significant distribution capabilities and improving the efficiency of our operations. 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.
Our ultimate objectives are achieving sustainable revenue growth, improving profitability and increasing the return on invested capital in each of our operations. We believe that by achieving these goals we will create sustainable value for our shareholders.
Our beverage businesses are supported by Oxxo, the largest convenience store chain in Mexico measured in terms of number of stores, which are managed by FEMSA Comercio, and by FEMSA Empaques, our glass bottle and aluminum can operation. These two businesses provide us with strategic competitive advantages and are also complemented by additional support businesses that manufacture crown caps and closures, commercial refrigerators, labels and flexible packaging and chemical products.
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 on May 6, 2003. The continental platform that this new combination produces -encompassing a significant territorial expanse in Mexico and Central America, plus most of the large urban centers in South America-we believe may provide us with opportunities to create value through both an improved ability to execute and the use of superior marketing tools.
During 2003, Coca-Cola FEMSA engaged in the integration of the Panamco territories while adjusting its strategies to a more competitive landscape, particularly in Mexico. In addition, FEMSA Cerveza continued to be immersed in a transformation process that has developed key competencies aimed at strengthening its consumer-focused orientation, namely excellence in execution, brand building capabilities, efficient asset utilization and the development of a powerful information system infrastructure. FEMSA Comercio further accelerated the expansion of the Oxxo convenience store chain by opening 582 net new stores.
Coca-Cola FEMSA
Overview and Background
Coca-Cola FEMSA is the largest Coca-Cola bottler in Latin America, with its territories representing approximately 40% of Coca-Cola sales volumes in Latin America, and the second largest bottler of Coca-Cola trademark beverages in the world, calculated in each case by sales volumes in unit cases sold in its territories in 2003. Coca-Cola FEMSA operates in the following territories:
- Mexico - a substantial portion of central Mexico (including Mexico City) and southeast Mexico (including the Gulf region).
- Central America - Guatemala City and surrounding areas, Nicaragua (nationwide), Costa Rica (nationwide) and Panama (nationwide).
- Colombia - most of the country.
- Venezuela - nationwide.
- Brazil - the area of greater São Paulo, Campinas, Santos, the state of Mato Grosso do Sul and part of the state of Goiás.
- Argentina -federal capital of Buenos Aires and surrounding areas.
The following is an overview of Coca-Cola FEMSA’s operations by territory in 2003:
Operations by Territory-Overview
Year Ended December 31, 2003(1)(2)
| Mexico | Central America | Colombia | Venezuela | Brazil | Argentina | |||||||
| Pesos | % | Pesos | % | Pesos | % | Pesos | % | Pesos | % | Pesos | % | |
| Total Revenues | 23,935.2 | 66.7% | 2,186.5 | 6.1% | 2,319.1 | 6.5% | 2,544.5 | 7.1% | 2,796.9 | 7.8% | 2,076.9 | 5.8% |
| Income from Operations | 5,633.6 | 84.0% | 218.4 | 3.2% | 261.1 | 3.9% | 231.5 | 3.5% | 149.8 | 2.2% | 215.6 | 3.2% |
| ______________________ | |
| (1) | The sums of the financial data for each of Coca-Cola FEMSA’s territories and percentages with respect thereto differ from its consolidated financial information due to intercompany transactions, which are eliminated in consolidation, and certain non-operating assets and activities of Coca-Cola FEMSA, including corporate services. |
| (2) | Expressed in millions of Mexican pesos. |
In 1979, a subsidiary of ours acquired certain soft drink bottler subsidiaries that are now a part of Coca-Cola FEMSA. At that time, the acquired subsidiaries had 13 Mexican distribution centers operating 701 distribution routes, and the production capacity of the acquired subsidiaries was 83 million physical cases. In 1991, we transferred our ownership in the subsidiaries to FEMSA Refrescos, S.A. de C.V., the corporate predecessor of Coca-Cola FEMSA.
Consistent with Coca-Cola FEMSA’s goals of maximizing long-term profitability and growth and enhancing its competitive position, 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. In September 1993, FEMSA sold Series L Shares that represented 19% 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. After giving effect to these transactions, we retained a 51% indirect interest in Coca-Cola FEMSA.
In a series of transactions between 1994 and 1997, Coca-Cola FEMSA acquired the territory for the federal capital of Buenos Aires by purchasing 100% of Coca-Cola FEMSA de Buenos Aires, S.A. de C.V. from a subsidiary of The Coca-Cola Company. Coca-Cola FEMSA expanded its Argentine operations in February 1996 by acquiring the former San Isidro Refrescos, S.A. territories, which we refer to as SIRSA, including certain properties of Refrescos del Norte, S.A. Through these transactions, Coca-Cola FEMSA expanded its Argentine operations to include the contiguous San Isidro and Pilar areas.
Coca-Cola FEMSA expanded its Mexican operations in November 1997 by acquiring 100% of Embotelladora de Soconusco, S.A. de C.V., a bottler in the Tapachula area of the state of Chiapas in southern Mexico. With this acquisition, Coca-Cola FEMSA services the entire state of Chiapas.
In May 2003, Coca-Cola FEMSA expanded its operations throughout Latin America by acquiring 100% of Panamco, then the largest soft drink bottler in Latin America in terms of sales volumes in 2002. Through Coca-Cola FEMSA’s acquisition of Panamco, Coca-Cola FEMSA began producing and distributing Coca-Cola trademark 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. The total cost of the transaction was approximately Ps. 29,518 million, excluding transaction expenses, and Coca-Cola FEMSA financed the acquisition as follows: Ps. 17,267 million of new debt (including approximately Ps. 5,245 million used to refinance existing Panamco indebtedness); a Ps. 2,779 million capital investment from FEMSA; the issuance of Coca-Cola FEMSA’s Series D Shares to subsidiaries of The Coca-Cola Company in exchange for a capital contribution of Ps. 7,041 million in the form of equity interests in Panamco; Ps. 2,820 million in cash; and Ps. 9,085 million of assumed net debt.
After the Panamco acquisition, we indirectly own 45.7% of Coca-Cola FEMSA’s capital stock, representing 53.6% of Coca-Cola FEMSA’s capital stock with full voting rights, and The Coca-Cola Company indirectly owns 39.6% of Coca-Cola FEMSA’s capital stock, representing 46.4% of Coca-Cola FEMSA’s capital stock with full voting rights. The remaining 14.7% of Coca-Cola FEMSA’s capital stock trades on the Mexican Stock Exchange and in the form of ADSs on the New York Stock Exchange.
Business Strategy
Coca-Cola FEMSA is the largest bottler of Coca-Cola trademark beverages in Latin America in terms of sales volumes in 2003, with operations in Mexico, Guatemala, Nicaragua, Costa Rica, Panama, Colombia, Venezuela, Brazil and Argentina. While Coca-Cola FEMSA’s corporate headquarters are in Mexico City, it has established divisional headquarters in the following three regions:
- Mexico with divisional headquarters in Mexico City;
- Latin Centro (covering territories in Guatemala, Nicaragua, Costa Rica, Panama, Colombia and Venezuela) with divisional headquarters in San José, Costa Rica; and
- Mercosur (covering territories in Brazil and Argentina) with divisional headquarters in São Paulo, Brazil.
Coca-Cola FEMSA seeks to provide its shareholders with an attractive return on their investment by increasing its profitability. The key factors in achieving profitability are increasing its revenues by implementing well planned product, package and pricing strategies through channel distribution and by implementing best practices in order to improve operational efficiencies throughout Coca-Cola FEMSA. To achieve these goals Coca-Cola FEMSA continues its efforts in:
- working with The Coca-Cola Company to continue exploring new lines of beverages that extend existing brands and allow Coca-Cola FEMSA to participate in new beverage segments;
- implementing packaging strategies designed to increase consumer demand for Coca-Cola FEMSA’s products and to build a strong returnable base in Coca-Cola FEMSA’s new territories;
- replicating Coca-Cola FEMSA’s successful best practices throughout the whole value chain within the newly acquired territories;
- rationalizing and adapting Coca-Cola FEMSA’s organizational and asset structure in order to be in a better position to respond to a changing competitive environment;
- strengthening Coca-Cola FEMSA’s selling capabilities in order to get closer to its clients, helping them satisfy the beverage needs of consumers;
- integrating Coca-Cola FEMSA’s operations through advanced information technology systems;
- evaluating Coca-Cola FEMSA’s bottled water strategy, in conjunction with The Coca-Cola Company, to maximize profitability across its market territories; and
- committing to building a best-in-class collaborative team, from top to bottom.
Coca-Cola FEMSA seeks to increase per capita consumption of soft drinks in the territories in which it operates. To that end, its marketing teams continuously develop sales strategies tailored to the different characteristics of its various territories and channels. Coca-Cola FEMSA continues to develop its product portfolio to better meet market demand and maintain overall profitability. To stimulate and respond to consumer demand, Coca-Cola FEMSA continues to introduce new products and new presentations. See “-Product and Packaging Mix.” Coca-Cola FEMSA also seeks to increase placement of refrigeration equipment, including promotional displays, through the strategic placement of such equipment in retail outlets in order to showcase and promote Coca-Cola FEMSA’s products. In addition, because Coca-Cola FEMSA views its relationship with The Coca-Cola Company as integral to its business strategy, Coca-Cola FEMSA uses market information systems and strategies developed with The Coca-Cola Company to improve its coordination with the worldwide marketing efforts of The Coca-Cola Company. See “-Marketing-Channel Marketing.”
Coca-Cola FEMSA seeks to rationalize its distribution capacity to improve the efficiency of its operations. In 2003, as part of the integration process from the acquisition of Panamco, Coca-Cola FEMSA closed several under-utilized manufacturing centers and shifted distribution activities to other existing facilities. In each of Coca-Cola FEMSA’s facilities, it seeks to increase productivity 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 non-alcoholic beverages.
Coca-Cola FEMSA continues with the integration process in its new Mexican territories, realizing synergies in back-office operations, manufacturing and procurement and has implemented closure and integration of facilities and headcount reductions. Coca-Cola FEMSA closed Panamco’s Miami and Mexico City offices, consolidating its headquarter operations into its original office in Mexico City. In its new territories it has replicated some of its traditional management practices and systems and has introduced several packing presentations across its new territories, strengthening Coca-Cola brands and offering new options to consumers. Coca-Cola FEMSA has implemented new pricing architecture strategies, differentiating returnable presentations from non-returnables in order to achieve an adequate combination of price and convenience.
Finally, Coca-Cola FEMSA focuses on management quality as a key element of its growth strategies and remains committed to fostering the development of quality management at all levels. Both FEMSA and The Coca-Cola Company provide Coca-Cola FEMSA with managerial experience. To build upon these skills, Coca-Cola FEMSA also offers management training programs designed to enhance executives’ abilities, and cross-fertilization programs, whereby a growing team of multinational executives exchange experiences, know how and talent among its new and existing territories.
Coca-Cola FEMSA Markets
The following map shows the locations of Coca-Cola FEMSA’s territories, giving in each case the population to which Coca-Cola FEMSA offers products, the number of retailers of its carbonated soft drinks and the per capita consumption of Coca-Cola FEMSA’s soft drink products:
Per capita consumption data for a territory is determined by dividing sales volumes within the territory (in bottles, jugs, cans, powders and fountain containers) 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 consumed annually per capita. In evaluating the development of local volume sales in its territories, Coca-Cola FEMSA and The Coca-Cola Company measure, among other factors, the per capita consumption of their carbonated beverages.
Coca-Cola FEMSA Products
Coca-Cola FEMSA produces, markets and distributes the following Coca-Cola trademark beverages, proprietary brands and brands licensed from third parties, as of March 15, 2004:
| Colas: | Mexico | Central America |
Colombia | Venezuela | Brazil | Argentina |
| Coca-Cola | a | a | a | a | a | a |
| Coca-Cola light | a | a | a | a | a | a |
| Coca-Cola light lemon | a | |||||
| Coca-Cola vanilla | a | a | a | |||
| Flavored Soft Drinks: | Mexico | Central America | Colombia | Venezuela | Brazil | Argentina |
| Beat | a | |||||
| Canada Dry ginger ale | a | |||||
| Chinotto | a | |||||
| Chinotto light | a | |||||
| Crush | a | |||||
| Delaware Punch | a | |||||
| Fanta | a | a | a | a | a | |
| Fanta light | a | a | ||||
| Fanta multi-flavors | a | a | a | |||
| Fresca | a | a | ||||
| Fresca pink grapefruit | a | |||||
| Frescolita | a | |||||
| Grapette | a | |||||
| Hit | a | |||||
| Kist (1) | a | |||||
| Kola Román (2) | a | |||||
| Kuat | a | |||||
| Kuat laranja | a | |||||
| Kuat light | a | |||||
| Lift | a | a | a | |||
| Lift green apple | a | a | ||||
| Mundet multi-flavors (3) | a | |||||
| Premio (1) | a | |||||
| Prisco (3) | a | |||||
| Quatro | a | a | a | a | ||
| Schweppes | a | a | ||||
| Senzao | a | |||||
| Sidral Mundet (3) | a | |||||
| Sidral Mundet light (3) | a | |||||
| Simba | a | |||||
| Sintonia | a | |||||
| Sprite | a | a | a | a | a | |
| Sprite light / Sprite Cero | a | a | a | |||
| Taí | a | a | ||||
| Water: | Mexico | Central America | Colombia | Venezuela | Brazil | Argentina |
| Alpina (1) | a | |||||
| Ciel | a | |||||
| Ciel Mineralizada | a | |||||
| Club K (1) | a | |||||
| Crystal (1) | a | |||||
| Dasani | a | |||||
| Kin | a | |||||
| Manantial (1) | a | |||||
| Nevada | a | |||||
| Pure Mountain (1) | a | |||||
| Santa Clara (1) | a | |||||
| Shangri-la (1) | a | |||||
| Soda Clausen (1) | a | |||||
| Soda Kin | a | |||||
| Other Categories: (4) | Mexico | Central America | Colombia | Venezuela | Brazil | Argentina | |||
| Black Fire | a | ||||||||
| Burn | a | ||||||||
| Flash Power | a | ||||||||
| Fruitopia | a | ||||||||
| Hi-C | a | a | |||||||
| Juizz (1) | a | ||||||||
| Kapo | a | ||||||||
| Keloco (1) | a | ||||||||
| Kin light | a | ||||||||
| Malta Regional (2) | a | ||||||||
| Mickey Aventuras | a | ||||||||
| Nativa | a | ||||||||
| Nestea (2) | a | a | a | a | |||||
| Polar | a | ||||||||
| Powerade | a | a | a | a | |||||
| Schweppes | a | a | |||||||
| Shangri-la (1) | a | ||||||||
| Sunfil | a | a | |||||||
| Super 12 (1) | a | ||||||||
| Super Malta (2) | a | ||||||||
| __________________ | |
| (1) | Proprietary brand. |
| (2) | Brand licensed from third parties other than The Coca-Cola Company. |
| (3) | Brands licensed from FEMSA. |
| (4) | Includes juices, sport drinks, dairy, malt, powder, iced tea and mixers. |
Sales Overview
Coca-Cola FEMSA measures 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 fountain syrup, powders and concentrate, refers to the volume of fountain 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 volumes for each of its territories. The sales volumes include the newly acquired Panamco territories only from May 2003.
| Sales Volume Year Ended December 31, |
|||
| 2003 | 2002 | 2001 | |
(millions of unit cases) |
|||
| Mexico | 850.1 | 504.7 | 477.9 |
| Central America | 72.9 | - | - |
| Colombia | 114.1 | - | - |
| Venezuela | 110.1 | - | - |
| Brazil | 176.6 | - | - |
| Argentina | 126.6 | 115.6 | 129.9 |
| Combined Volume | 1,450.5 | 620.3 | 607.8 |
Product and Packaging Mix
Coca-Cola FEMSA's single most important brand is Coca-Cola , which accounted for 60.2% of its total consolidated sales volume in 2003. Fanta, Sprite, Lift and Fresca , Coca-Cola FEMSA's next largest brands in consecutive order, accounted for 5.1%, 3.1%, 2.4% and 2.1%, respectively, of sales volumes in 2003. Coca-Cola FEMSA produces, markets and distributes Coca-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 made of PET. Presentation sizes for Coca-Cola trademark beverages range from a 6.5-ounce personal size to a 20-liter multi-serving size. Coca-Cola FEMSA considers multi-serving size presentations as equal to or larger than 1.0 liter. In general, personal sizes have a higher price per unit case as compared to multi-serving sizes. Coca-Cola FEMSA offers both returnable and non-returnable presentations, which allows it to offer different combinations of convenience and price to implement revenue management strategies and to target specific distribution channels and population segments in its territories. In addition, Coca-Cola FEMSA sells some Coca-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 jug presentations, which is a presentation larger than 17 liters, that have a much lower price per unit than its other beverage products.
In addition to Coca-Cola trademark beverages, Coca-Cola FEMSA produces, markets and distributes certain other proprietary brands and beverages licensed from third parties other than The Coca-Cola Company in a variety of presentations.
The characteristics of Coca-Cola FEMSA's territories are very diverse. Central Mexico is densely populated and has a large number of competing soft drink brands and higher per capita income as compared to the rest of Coca-Cola FEMSA's territories. Brazil and Argentina are densely populated but have lower per capita consumption of soft drink products as compared to Mexico. Portions of Central America and Colombia are large and mountainous areas with lower population density, lower per capita income and lower per capita consumption of soft drink products. In Venezuela, per capita income and consumption have been affected due to the economic and political unrest in recent years. In recent years, per capita income has been negatively affected by macroeconomic conditions in most of the countries where Coca-Cola FEMSA operates.
The following discussion analyzes Coca-Cola FEMSA's product and packaging mix by territory. The volume data presented is for the years 2002 and 2003 and includes the newly acquired territories for all of 2002 and the first four months of 2003 prior to the acquisition of Panamco. As discussed above, Coca-Cola FEMSA did not acquire these territories until May 6, 2003. Nonetheless, Coca-Cola FEMSA believes that presenting the prior periods in this section provides a more complete illustration of the characteristics of its territories than would be possible based solely on information from the last eight months of 2003. It has not included information for periods prior to 2002. It has presented above under “Sales Overview” its actual sales volumes by territory for the three years ended December 31, 2001, 2002 and 2003, which include the newly acquired territories solely for eight months of 2003.
Mexico. Coca-Cola FEMSA's product portfolio consists of Coca-Cola trademark beverages, and since 2001 has included third party Mundet trademark beverages. In 2003, it expanded its core brand portfolio line launching the flavored soft drinks Fanta multi-flavors, Fresca pink grapefruit and Lift green apple . It also introduced Coca-Cola vanilla in its Mexican territories, strengthening the cola category. Soft drink per capita consumption in Mexico during 2003 was 483 eight-ounce servings.
The following table highlights historical sales volume and mix in Mexico for Coca-Cola FEMSA's products:
| Year Ended December 31,
|
||
| 2003 | 2002 | |
| Product Sales Volumes | (millions of unit cases) |
|
| Coca-Cola Trademark Beverages | 985.4 | 964.6 |
| Other Beverages | 16.2
|
15.9
|
| Total | 1,001.6
|
980.5 |
| % Growth | 2.2% | - |
| Unit Case Volume Mix by Category | (in percentages) | |
| Colas | 59.8% | 60.8% |
| Flavored Soft Drinks | 18.7 | 17.2 |
| Total Carbonated Soft Drinks | 78.5 | 78.0 |
| Water (1) | 20.9 | 20.7 |
| Other Categories | 0.6
|
1.3
|
| Total | 100.0%
|
100.0%
|
| Product Mix by Presentation | (in percentages) | |
| Returnable | 27.9% | 28.2% |
| Non-returnable | 54.9 | 53.6 |
| Fountain | 1.3 | 1.3 |
| Jug | 15.9
|
16.9
|
| Total | 100.0%
|
100.0%
|
| __________________ | |
| (1) | Includes jug volumes. |
Coca-Cola FEMSA's most popular soft drink presentations are the 2.5-liter and 2.0-liter returnable plastic bottles, the 0.6-liter non-returnable plastic contour bottle, and the 2.5-liter and the 2.0-liter non-returnable plastic bottle, which combined accounted for more than 60% of its total soft drink sales volume in 2003 in Mexico. Since 1995, Coca-Cola FEMSA has introduced a number of new presentations in Mexico. These include 2.5-liter and 2.0-liter returnable plastic bottles, 1.0-liter non-returnable plastic bottles, eight-ounce non-returnable glass bottles, 0.25-liter non-returnable plastic bottles and 0.6-liter plastic contour bottles to replace the 0.5-liter non-returnable glass and plastic presentations. In 2003, Coca-Cola FEMSA launched new 2.5-liter returnable and non-returnable presentations.
Multi-serving presentations are an important component of Coca-Cola FEMSA's product mix. In 2003, multi-serving presentations represented 67% of its total soft drink sales volumes in Mexico, as compared to 64% in 2002. Coca-Cola FEMSA expects that demand for multi-serving presentations will continue increasing. Coca-Cola FEMSA believes that the popularity of multi-serving presentations is primarily attributable to the lower price per ounce of product in larger presentations.
In the past, the packaging trend in the soft drink industry in Mexico had moved toward non-returnable presentations. However, due to the entrance of low price brands in multi-serving size presentations, Coca-Cola FEMSA has refocused its packaging mix strategy to reinforce its sales of multi-serving size returnable packages, and as a result non-returnable presentations remained almost flat in 2003 as compared to 2002. Returnable plastic and glass presentations offer consumers a more affordable, although less convenient, product, and Coca-Cola FEMSA believes returnable packages present an opportunity for Coca-Cola FEMSA to attract new customers and maintain customer loyalty, because they make Coca-Cola trademark beverages more attractive to price-sensitive consumers. The price of a 2.5-liter returnable package is approximately 30% less than the same size non-returnable package. Th ese returnable products are mainly sold to small store retailers, representing the largest distribution channel in the Mexican market, that benefit from returnable bottles' lower price per ounce of product, allowing them to compete with larger supermarkets. Coca-Cola FEMSA believes that its continued commitment to returnable bottle availability will allow it to compete with low-price entrants to the Mexican soft drink market.
Total sales volumes reached 1,001.6 million unit cases in 2003, increasing 2.2% compared to 2002, including a 2.9% carbonated soft drink volume growth during the same period. The volume growth was mainly driven by (i) the solid performance of Coca-Cola FEMSA's new flavored brands including Fanta multi-flavors, Fresca pink grapefruit and Lift green apple , accounting for approximately 70% of the incremental volumes during the year, (ii) the incremental sales volumes reached by Ciel still water in a 5.0-liter presentation, and (iii) volume growth from Coca- Cola brand beverages. This volume growth was partially offset by a decline in jug water volume, mainly in the 19.0-liter water jug presentation, the result of new revenue management initiatives intended to improve the profitability of Coca-Cola FEMSA's bottled water business in its new territories, and to a lesser extent to the increased size of multi-serving presentations.
In 2003, product and packaging innovation helped Coca-Cola FEMSA weather a relatively weak economic environment and increased competition from low price soft drink brands in multi-serving size presentations, which have increased their presence and product alternatives in certain areas of Coca-Cola FEMSA's Mexican territories. With the introduction of its new multi-serving size 2.5-liter returnable and non-returnable presentations, for the Coca-Cola brand and selected flavors, Coca-Cola FEMSA reduced the price gap per ounce versus low price brands during 2003, enhancing the value proposition for its customers.
Central America. Coca-Cola FEMSA's product sales in Central America consist predominantly of Coca-Cola trademark beverages. During 2003 it launched the Dasani water brand in one of its Central American territories. Soft drink per capita consumption in Central America during 2003 was 131 eight-ounce servings.
The following table highlights historical sales volume mix and total sales volumes in Central America :
| Year Ended December 31,
|
||
| 2003 | 2002 | |
| Product Sales Volumes | (millions of unit cases) |
|
| Coca-Cola Trademark Beverages | 99.6 | 93.3 |
| Other Beverages | 7.7
|
6.8
|
| Total | 107.3
|
100.1
|
| % Growth | 7.2% | - |
| Unit Case Volume Mix by Category | (in percentages) | |
| Colas | 69.4% | 69.6% |
| Flavored Soft Drinks | 24.7 | 23.7 |
| Total Carbonated Soft Drinks | 94.1 | 93.3 |
| Water | 4.2 | 4.0 |
| Other Categories | 1.7
|
2.7
|
| Total | 100.0%
|
100.0%
|
| Product Mix by Presentation | (in percentages) | |
| Returnable | 51.8% | 50.9% |
| Non-returnable | 42.9 | 43.4 |
| Fountain | 5.3 | 5.7 |
| Jug | -
|
-
|
| Total | 100.0%
|
100.0%
|
In Central America, Coca-Cola FEMSA sells the majority of its sales volume through small retailers. In 2003, multi-serving presentations represented 47.5% of its total soft drink sales volumes in Central America. It also launched a 2.0-liter returnable presentation in Central America for Coca-Cola brand and selected flavor brands in 2003 to take advantage of the trend to larger presentations.
Total sales volumes reached 107.3 million unit cases in 2003, increasing 7.2% compared to 2002, including 8.1% growth in carbonated soft drink sales volumes during the same period. The sales volume growth was mainly driven by (i) the solid performance of the cola category, increasing almost 7% during the year, and representing 66% of the incremental volumes, especially in Coca-Cola FEMSA's territories in Guatemala and Nicaragua, and (ii) the incremental sales volume reached by the carbonated soft drink flavor segment, which represented the majority of the balance.
Colombia. Coca-Cola FEMSA's product portfolio in Colombia consists of Coca-Cola trademark beverages, certain products sold under proprietary trademarks, as well as sales of the Kola Román brand, which it licenses from a third party. Soft drink per capita consumption in Colombia during 2003 was 80 eight-ounce servings.
The following table highlights historical sales volume mix and total sales volumes in Colombia :
| Year Ended December 31,
|
||
| 2003 | 2002 | |
| Product Sales Volumes | (millions of unit cases) |
|
| Coca-Cola Trademark Beverages | 133.5 | 139.0 |
| Other Beverages | 38.3
|
46.0
|
| Total | 171.8
|
185.0
|
| % Growth | (7.1)% | -- |
| Unit Case Volume Mix by Category | (in percentages) | |
| Colas | 62.4% | 60.4% |
| Flavored Soft Drinks | 22.3 | 21.8 |
| Total Carbonated Soft Drinks | 84.7 | 82.2 |
| Water (1) | 15.1 | 17.5 |
| Other Categories | 0.2
|
0.3
|
| Total | 100.0%
|
100.0%
|
| Product Mix by Presentation | (in percentages) | |
| Returnable | 53.4% | 53.8% |
| Non-returnable | 36.8 | 35.3 |
| Fountain | 3.0 | 3.0 |
| Jug | 6.8
|
7.9
|
| Total | 100.0%
|
100.0%
|
| __________________ | |
| (1) | Includes jug volumes. |
The Colombian market is characterized by lower per capita consumption and relatively lower levels of multi-serving presentations. In 2003, multi-serving presentations represented 45.7% of Coca-Cola FEMSA's total soft drink sales volumes in Colombia. Coca-Cola FEMSA is continuing to evaluate the right product, package and pricing architecture for its portfolio of brands in Colombia.
Total sales volumes amounted to 171.8 million unit cases in 2003, decreasing 7.1% compared to 2002, including a 4.4% carbonated soft drink volume decline during the same period. The volume decline was mainly driven by a reduction in the production of water sold in less profitable packages, which accounted for almost 50% of the volume decline during the year. Carbonated soft drinks accounted for the balance.
Venezuela. Coca-Cola FEMSA's product portfolio in Venezuela consists predominantly of Coca-Cola trademark beverages. Soft drink per capita consumption in Venezuela during 2003 was 123 eight-ounce servings.
The following table highlights historical sales volume mix and total sales volumes in Venezuela :
| Year Ended December 31, |
||
| 2003 | 2002 | |
| Product Sales Volumes | (millions of unit cases) |
|
| Coca-Cola Trademark Beverages | 148.6 | 160.6 |
| Other Beverages | 3.0
|
2.3
|
| Total | 151.6
|
162.9
|
| % Growth | (6.9)% | - |
| Unit Case Volume Mix by Category | (in percentages) | |
| Colas | 57.0% | 48.2% |
| Flavored Soft Drinks | 29.2 | 34.0 |
| Total Carbonated Soft Drinks | 86.2 | 82.2 |
| Water (1) | 8.2 | 10.6 |
| Other Categories | 5.6
|
7.2
|
| Total | 100.0%
|
100.0%
|
| Product Mix by Presentation | (in percentages) | |
| Returnable | 36.4% | 39.1% |
| Non-returnable | 57.6 | 52.5 |
| Fountain | 2.7 | 3.0 |
| Jug | 3.3
|
5.4
|
| Total | 100.0%
|
100.0%
|
| __________________ | |
| (1) | Includes jug volumes. |
During January of 2003, political unrest in Venezuela due to a national strike made it practically impossible for Panamco to run its Venezuelan operation on a regular basis. Supply shortages during the first quarter and a severe economic recession significantly affected volume performance during 2003. Coca-Cola FEMSA re-introduced the one-liter returnable glass presentation for the Coca-Cola brand in 2003, which it believes had a positive impact on sales volumes in 2003.
Total sales volumes decreased in 2003 to 151.6 million unit cases, including a decrease of 2.3% in carbonated soft drink volumes. Carbonated soft drink flavors accounted for almost 60% of the sales volume decline during the year, and still bottled water accounted for the majority of the balance, driven by a change of consumption habits of the population toward tap water due to the country's economic recession.
Brazil. Coca-Cola FEMSA's product portfolio in Brazil consists mainly of Coca-Cola trademark beverages. Pursuant to an agreement with Cervejarias Kaiser, Coca-Cola FEMSA distributes the Kaiser brands of beer, which represented 18.2% of its sales volumes in Brazil in 2003. During 2003, it expanded its product lines, introducing Coca-Cola light lemon, Kuat laranja and Sintonia . Soft drink per capita consumption in Brazil during 2003 was 189 eight-ounce servings.
The following table highlights historical sales volume mix and total sales volumes in Brazil:
| Year Ended December 31,
|
||
| 2003 | 2002 | |
| Product Sales Volumes | (millions of unit cases) |
|
| Coca-Cola Trademark Beverages | 206.1 | 239.5 |
| Other Beverages | 59.0
|
83.1
|
| Total | 265.1
|
322.6
|
| % Growth | (17.8)% | - |
| Unit Case Volume Mix by Category | (in percentages) | |
| Colas | 53.4% | 47.5% |
| Flavored Soft Drinks | 23.7 | 26.7 |
| Total Carbonated Soft Drinks | 77.1 | 74.2 |
| Water | 4.1 | 5.1 |
| Other Categories (1) | 18.8
|
20.7
|
| Total | 100.0%
|
100.0%
|
| Product Mix by Presentation | (in percentages) | |
| Returnable | 11.1% | 11.9% |
| Non-returnable | 85.1 | 84.1 |
| Fountain | 3.8 | 4.0 |
| Jug | -
|
-
|
| Total | 100.0%
|
100.0%
|
| __________________ | |
| (1) | Includes beer. |
During 2003, Coca-Cola FEMSA initiated a packaging differentiation strategy intended to diversify its operation from 2.0-liter PET non-returnable packages and cans, which together accounted for almost 80% of sales volumes in 2002 and the beginning of 2003. Coca-Cola FEMSA launched more than six different packaging presentations during 2003, including a new 12-ounce non-returnable glass bottle and a new 200-milliliter returnable glass bottle in order to offer convenience and affordability for the on-premise segment. By selling more profitable stock keeping units or SKUs, Coca-Cola FEMSA intends to strengthen its packaging and brand portfolio, and enhance its pricing architecture in order to increase the profitability of the segment.
Total sales volumes amounted to 265.1 million unit cases in 2003, decreasing 17.8% compared to 2002 volumes, including a 14.7% decline in non-profitable carbonated beverage sales volumes during the same period. The majority of the volume decline during 2003 came from 2.0-liter non-returnable presentations, especially for low margin products like Simba and Taí , as Coca-Cola FEMSA tried to reach a better price value combination by shifting to more profitable presentations. Carbonated soft drinks accounted for 60% of the volume decline during 2003, beer represented 30% and bottled water represented the balance.
Argentina. Coca-Cola FEMSA's product portfolio in Argentina consists exclusively of Coca-Cola trademark beverages. Soft drink per capita consumption in Argentina during 2003 was 276 eight-ounce servings.
The following table highlights historical sales volume mix and total sales volumes in Argentina :
| Year Ended December 31, |
||
| 2003 |
2002 |
|
| Product Sales Volumes | (millions of unit cases) | |
| Coca-Cola Trademark Beverages | 126.6 | 115.6 |
| Other Beverages | -
|
-
|
| Total | 126.6
|
115.6
|
| % Growth | 9.5% | - |
| Unit Case Volume Mix by Category | (in percentages) | |
| Colas | 71.4% | 68.3% |
| Flavored Soft Drinks | 27.4 | 30.4 |
| Total Carbonated Soft Drinks | 98.8 | 98.7 |
| Water | 0.9 | 0.8 |
| Other Categories | 0.3
|
0.5
|
| Total | 100.0%
|
100.0%
|
| Product Mix by Presentation | (in percentages) | |
| Returnable | 24.5% | 12.4% |
| Non-returnable | 71.8 | 82.9 |
| Fountain | 3.7 | 4.7 |
| Jug | -
|
-
|
| Total | 100.0%
|
100.0%
|
In 2002, in order to minimize the impact of the deteriorated economic situation in Argentina, as well as increase the affordability of its products, Coca-Cola FEMSA launched new returnable presentations such as a 1.25-liter returnable glass presentation and a 2.0-liter returnable PET presentation, which combined with existing presentations accounted for 25% of its sales volumes in 2003. During 2003, Coca-Cola FEMSA also experienced an increase in its premium brands fostered by the launch of Fanta light and the slow recovery of the Argentine economy.
Total sales volumes amounted to 126.6 million unit cases in 2003, increasing 9.5% compared to 2002. The sales volume increase was mainly driven by Coca-Cola FEMSA's returnable packaging strategy and the economic recovery from the devaluation of the Argentine peso in 2002. Coca-Cola FEMSA also experienced a product shift from its less profitable value protection brands, Taí and Crush , toward its core and premium brands, the Coca-Cola brand and Fanta, which increased 15.1% and 40.6%, respectively. For the first time, in 2003 Coca-Cola FEMSA sold more sales volumes from premium brands than from value protection brands, fostered by a 10.9% volume increase of the Coca-Cola light brand and the successful introduction of Fanta light during the year. Premium brands represented 12.2% of total sales volumes during 2003.
Marketing
Coca-Cola FEMSA, in conjunction with The Coca-Cola Company, has developed a sophisticated marketing strategy to promote the sale and consumption of Coca-Cola FEMSA's products. It relies extensively on advertising, sales promotions and non-price related retailer incentive programs designed by local affiliates of The Coca-Cola Company to target the particular preferences of Coca-Cola FEMSA's soft drink consumers. Through the use of advanced information technology, Coca-Cola FEMSA has collected customer and consumer information that allow it to tailor marketing strategies to the types of customers located in each of its territories and to meet the specific needs of the various market segments it serves. Coca-Cola FEMSA is in the process of rolling out its information technology system in its new territories in order to standardize the systems in these territories with its original territories.
Retailer Incentive Programs. Incentive programs include providing retailers with commercial refrigerators for the display and cooling of soft drink products and for point-of-sale display materials. Coca-Cola FEMSA seeks, in particular, to increase distribution coolers among retailers to increase the visibility and consumption of Coca-Cola FEMSA's products and to ensure that they are sold at the proper temperature. Sales promotions include sponsorship of community activities, sporting, cultural and social events and consumer sales promotions such as contests, sweepstakes and product giveaways.
Advertising. Coca-Cola FEMSA advertises in all major communications media. It focuses its advertising efforts on increasing brand recognition by consumers and improving customer relations. National advertising campaigns are designed and proposed by The Coca-Cola Company's local affiliates, with Coca-Cola FEMSA's input at the local or regional level.
Channel Marketing. In order to provide more dynamic and specialized marketing of its products, Coca-Cola FEMSA's strategy is to segment its market and develop targeted efforts for each 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 soft drink consumers in each of the various 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.
Coca-Cola FEMSA believes that the implementation of its channel marketing strategy also enables it to respond to competitive initiatives with channel-specific responses as opposed to market-wide responses. This focused response capability isolates the effects of competitive pressure in a specific channel, thereby avoiding costlier market-wide responses. Coca-Cola FEMSA's channel marketing activities are facilitated by its management information systems. It has invested significantly in creating such systems, including in hand-held computers to support the gathering of product, consumer and delivery information required to implement its channel marketing strategies effectively, for most of its sales routes in Mexico and Argentina, and will continue investing to increase pre-sale coverage in certain of its new territories.
Cooperative Marketing Budget. Coca-Cola FEMSA 's consolidated total marketing expenditure made in 2003 was Ps. 1,498.4 million. In 2002 and 2003, The Coca-Cola Company contributed 48% and 41%, respectively, of Coca-Cola FEMSA's marketing expenditures budget. See “Item 10. Additional Information – Material Contracts – Coca-Cola FEMSA – Bottler Agreements.”
Product Distribution
The following table provides an overview of Coca-Cola FEMSA's product distribution centers and the retailers to which it sells its products:
Product Distribution Summary
As of December 31, 2003
| Mexico | Central America | Colombia | Venezuela | Brazil | Argentina | |
| Distribution Centers | 113 | 43 | 42 | 38 | 10 | 4 |
| Number of Retailers (1) | 547,185 | 139,289 | 442,210 | 234,740 | 120,008 | 75,735 |
| __________________ | |
| (1) | Estimated. |
Coca-Cola FEMSA uses two main sales methods depending on market and geographic conditions: the traditional or conventional truck route system, in which the person in charge of the delivery makes immediate sales from inventory available on the truck, and the pre-sale system. The pre-sale program separates the sales and delivery functions, allowing sales personnel to sell products prior to delivery and enabling trucks to be loaded with the mix of products that retailers have previously ordered, thereby increasing distribution efficiency. Under the pre-sale program, sales personnel also provide merchandising services during retailer visits, which Coca-Cola FEMSA believes enhances the presentation of its products at the point of sale. In certain areas Coca-Cola FEMSA also makes sales through third party wholesalers of Coca-Cola FEMSA's products. The vast majority of its sales are on a cash basis.
Coca-Cola FEMSA believes that service visits to retailers and frequency of deliveries are essential elements in an effective distribution system for soft drink products. Accordingly, it has continued to expand its pre-sale system throughout its operations, except in areas where it believes consumption patterns do not warrant pre-sale. Coca-Cola FEMSA is in the process of replicating this business model in its new territories.
Coca-Cola FEMSA's distribution centers range from large warehousing facilities and re-loading centers to small deposit centers. In addition to its fleet of trucks, Coca-Cola FEMSA distributes its products in certain locations through a fleet of electric carts and hand-trucks in order to comply with local environmental and traffic regulations. Coca-Cola FEMSA generally retains third parties to transport its finished products from the bottler plants to the distribution centers.
Mexico. Coca-Cola FEMSA contracts with a subsidiary of ours for the transportation of finished products to 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 2003, Coca-Cola FEMSA implemented these practices in the newly acquired Mexican territories.
In Mexico, Coca-Cola FEMSA sells a majority of its beverages at small retail stores to customers who take the beverages home or elsewhere for consumption. It also sells products through the “on-premise” segment, supermarkets and others. “On premise” consists of (i) sales through sidewalk stands, restaurants, bars and various types of dispensing machines and (ii) sales through point of sale programs in concert halls, auditoriums and theaters by means of a series of arrangements with Mexican promoters.
Central America. In Central America, Coca-Cola FEMSA distributes its finished products to retailers through a combination of its own fleet of trucks and third party distributors. In Central America, excluding Guatemala, Coca-Cola FEMSA sells more than 50% of its sales volumes through the pre-sale system in 2003. In Guatemala, Coca-Cola FEMSA sold only around 10% of its sales volumes through pre-sale in 2003, but currently plans to increase pre-sale coverage in the future. In its Central American operations, just as in most of Coca-Cola FEMSA's territories, an important part of its sales volumes is through small retailers, and it has low supermarket penetration in this region, representing less than 8% of its sales volumes in 2003.
Colombia. Approximately half of Coca-Cola FEMSA's sales volumes in Colombia are sold through pre-sale and half through the traditional system in 2003. Coca-Cola FEMSA distributes its finished products to retailers through a combination of its own fleet of trucks and third party distributors. Since May 2003, it consolidated five distribution centers out of 47 in its Colombian operations, with the objective of increasing productivity levels and asset utilization.
Venezuela. In Venezuela close to 70% of Coca-Cola FEMSA's sales volumes in 2003 were through the pre-sale system. Coca-Cola FEMSA distributes its finished products to retailers through a combination of its own fleet of trucks and third party distributors. During 2003 it consolidated the operations of two of the 40 distribution facilities. Its Venezuelan operations distribute a significant part of sales volumes through small retailers and supermarkets, which represent approximately 13% of its sales volumes in 2003.
Brazil. In Brazil, almost 100% of Coca-Cola FEMSA's sales are through the pre-sale system, although the delivery of finished products to customers is by a third party. At the end of 2003, it operated ten distribution facilities in its Brazilian territories. In contrast with the rest of Coca-Cola FEMSA's territories, which have low supermarket penetration, in Brazil it sold more than 25% of its sales volume through supermarkets in 2003. In addition, in designated zones independent wholesalers purchase Coca-Cola FEMSA's products at a discount from the wholesale price and resell the products to retailers. Independent wholesalers distributed approximately 16% of its products in 2003.
Argentina. At December 31, 2003, Coca-Cola FEMSA operated four distribution centers in Argentina. Coca-Cola FEMSA distributes its finished products to retailers through a combination of its own fleet of trucks and third party distributors. Independent wholesalers distributed approximately 5.7 % of its products in 2003.
In Argentina, in 2003 Coca-Cola FEMSA sold the majority of its products in the take-home segment, which consists of sales to consumers who take the beverages home or elsewhere for consumption. In 2003, the percentage of sales volumes through supermarkets decreased to 17.9% from 23.4% in 2002.
Competition
Although Coca-Cola FEMSA believes that its products enjoy wider recognition and greater consumer loyalty than those of its principal competitors, the soft drink segments in the territories in which Coca-Cola FEMSA operates are highly competitive. Its principal competitors are local bottlers of Pepsi and other bottlers and distributors of national and regional soft drink 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 its competitors in Central America and Brazil also offer both soft drinks and beer, which may enable them to achieve distribution efficiencies.
During 2003, Coca-Cola FEMSA faced new competitive pressures that are different than those it has historically faced as it began operations in Central America, Colombia, Venezuela and Brazil. In addition, distribution and marketing practices in some of these territories differ from Coca-Cola FEMSA's historical practices.
Recently, price discounting and packaging have joined consumer sales promotions, customer service and non-price retailer incentives as the primary means of competition among soft drink bottlers. Coca-Cola FEMSA competes by seeking to offer an attractive price / value proposition to the different segments in its markets and by building on its brand equity. 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 Coca-Cola FEMSA's products, provide different options to consumers and increase new consumption opportunities. See “–Sales Overview.”
Mexico. Coca-Cola FEMSA's principal competitors in Mexico are bottlers of Pepsi products, whose territories overlap but are not co-extensive with those of Coca-Cola FEMSA. These competitors include Pepsi Gemex in central Mexico, a subsidiary of PBG, the largest bottler of Pepsi globally, and several other Pepsi bottlers in central and southeast Mexico. In addition, Coca-Cola FEMSA competes with Cadbury Schweppes and with other national and regional brands in its Mexican territory. Coca-Cola FEMSA also faces an increase in competition from low price producers offering multi-serving size presentations in the soft drink industry.
Central America. In the countries that comprise its Central America territory, Coca-Cola FEMSA's main competitors are Pepsi bottlers. In Guatemala and Nicaragua it competes against The Central American Bottler Corporation, in Costa Rica its principal competitor is Embotelladora Centroamericana, S.A. and in Panama its main competitor is Refrescos Nacionales, S.A.
Colombia. Coca-Cola FEMSA's principal competitor is Postobón S.A., which we refer to as Postobón, a well-established local bottler that sells flavored soft drinks, some of which have a wide consumption preference, such as cream soda, the second most popular category in the Colombian soft drink industry in terms of sales volumes, and Pepsi products. Postobón is a vertically integrated producer, the owners of which hold other significant commercial interests in Colombia.
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. It also competes with the producers of Kola Real in part of the country.
Brazil. In Brazil, Coca-Cola FEMSA competes against AmBev, a Brazilian company with a portfolio of brands that includes Pepsi, local brands with flavors such as guaraná and proprietary beers. It also competes against “B” brands or “Tubainas,” which are small, local producers of low cost flavored soft drinks in multi-serving presentations that represent an important portion of the soft drink market.
Argentina. In Argentina, Coca-Cola FEMSA's main competitor is BAESA, a Pepsi bottler, which is owned by Argentina 's principal brewery, Quilmes Industrial S.A., and indirectly controlled by AmBev. In addition to BAESA, competition has intensified over the last several years with the entrance of a number of competitors offering generic, low priced soft drinks as well as many other generic products and private label proprietary supermarket brands.
Production and Distribution Facilities
Over the past several years, Coca-Cola FEMSA has made significant capital improvements to modernize its facilities and improve operating efficiency and productivity, including:
-
increasing the annual capacity of its bottler plants;
-
installing clarification facilities to process different types of sweeteners;
-
installing plastic bottle-blowing equipment and can presentation capacity;
-
modifying equipment to increase flexibility to produce different presentations, including swing lines that can bottle both non-returnable and returnable presentations; and
-
closing obsolete production facilities.
As of December 31, 2003, Coca-Cola FEMSA owned 32 bottler plants. By country, Coca-Cola FEMSA has twelve bottler facilities in Mexico, four in Central America, six in Colombia, six in Venezuela, three in Brazil and one in Argentina.
Since the Panamco acquisition during 2003, Coca-Cola FEMSA consolidated 20 of its plants into existing facilities, including four plants in Mexico, one in Central America, eleven in Colombia, three in Venezuela and one in Brazil. At the same time, Coca-Cola FEMSA increased its productivity measured in unit cases sold by its remaining plants by more than 50% company wide.
As of December 31, 2003, Coca-Cola FEMSA operated 250 distribution centers, more than 40% of which were in its Mexican territories. Coca-Cola FEMSA owns approximately 80% of these distribution centers and leases the remainder. See “ –Product Distribution.” During 2003, as part of its consolidation process, Coca-Cola FEMSA closed 37 distribution centers across its territories.
The table below sets forth the location, principal use, installed capacity and percentage utilization of Coca-Cola FEMSA's production facilities by country:
Production Facility Summary
As of December 31, 2003
| Country |
Principal Use
|
Installed Capacity (thousands of unit cases) |
% Utilization (1)
|
Mexico |
Bottler Facility |
1,417,345 |
59.5% |
Guatemala |
Bottler Facility |
30,303 |
54.6% |
Nicaragua |
Bottler Facility |
26,807 |
70.8% |
Costa Rica |
Bottler Facility |
37,992 |
56.3% |
Panama |
Bottler Facility |
28,830 |
36.1% |
Colombia |
Bottler Facility |
264,036 |
37.5% |
Venezuela |
Bottler Facility |
268,763 |
42.1% |
Brazil |
Bottler Facility |
378,969 |
56.3% |
Argentina |
Bottler Facility |
206,736 |
60.3% |
| __________________ | |
| (1) | Annualized rate. |
Taxation of Soft Drinks
All the countries in which Coca-Cola FEMSA operates, except for Panama, impose a value-added tax on the sale of soft drinks, with a rate of 15% in Mexico, 12% in Guatemala, 15% in Nicaragua, 13% in Costa Rica, 5% in Panama, 16% in Colombia, 16% in Venezuela, 18% in Brazil (only in the territories where Coca-Cola FEMSA operates) and 21% in Argentina. In addition, several of the countries in which Coca-Cola FEMSA operates impose the following excise or other taxes:
- Mexico imposes a 20% excise tax on soft drinks produced with high fructose corn syrup or HFCS in January 2002 that was suspended in September 2002. In January 2003, the Mexican government implemented a 20% excise tax on carbonated soft drinks produced with non-sugar sweeteners.
- Guatemala imposes an excise tax of 0.18 cents in local currency (Ps. 0.25 as of December 31, 2003) per liter of soft drink.
- Nicaragua imposes a 9% consumption tax.
- Costa Rica imposes a specific tax on non-alcoholic bottled beverages based on the combination of packaging and flavor, a 5% tax on local brands, a 10% tax on foreign brands and a 14% tax on mixers.
- Panama imposes a 5% tax based on the cost of goods produced.
- Brazil imposes an excise tax of 9% and a consumption tax of 6.9% in the terriritories where Coca-Cola FEMSA operates.
- Argentina imposes an excise tax on colas and on flavored soft drinks containing less than 5% lemon juice or less than 10% fruit juice of 8.7%, and an excise tax on flavored soft drinks with 10% or more fruit juice, and on mineral water of 4.2%.
Price Controls on Soft Drinks
At present, there are no price controls on soft drinks in any of our territories. In Mexico, prior to 1992, prices of carbonated soft drinks were regulated by the Mexican government. From 1992 to 1995, the industry was subject to voluntary price restraints. In response to the devaluation of the Mexican peso relative to the U.S. dollar in 1994 and 1995, however, the Mexican government adopted an economic recovery plan to control inflationary pressures in 1995. As part of this plan, the Mexican government encouraged the Asociación Nacional de Productores de Refrescos y Aguas Carbonatadas, A.C. (the National Association of Bottlers) to engage in voluntary consultations with the Mexican government with respect to price increases for returnable presentations. These voluntary consultations were terminated in 1996. In the last ten years, the governments in Colombia, Brazil and Venezuela have also imposed formal price controls on soft drinks. The imposition of price controls in the future may limit Coca-Cola FEMSA’s ability to set prices and adversely affect its results of operations.
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 Argentina and Brazil, its highest sales levels occur during the summer months of October through March and the Christmas holidays in December.
Raw Materials
Pursuant to the bottler agreements with The Coca-Cola Company, Coca-Cola FEMSA is required to purchase concentrate, including aspartame, an artificial sweetener used in diet sodas, for all Coca-Cola trademark beverages from companies designated by The Coca-Cola Company. The price of concentrate for all Coca-Cola trademark beverages is a percentage of the average price Coca-Cola FEMSA charges to its retailers net of applicable taxes. Although The Coca-Cola Company has the right to unilaterally set the price of concentrates, in practice this percentage is set pursuant to periodic negotiations with The Coca-Cola Company. In connection with the Panamco acquisition, The Coca-Cola Company agreed that concentrate prices would not be raised through May 2004. See “Item 10. Additional Information–Material Contracts–Coca-Cola FEMSA–The Coca-Cola Memorandum.” In most cases, concentrate is purchased in the local currency of the territory.
In addition to concentrates, Coca-Cola FEMSA purchases sweeteners, carbon dioxide, glass and plastic bottles, cans, closures and fountain containers, as well as other packaging materials. Its bottler agreements provide that, with respect to Coca-Cola trademark beverages, all containers, closures, cases, cartons and other packages and labels may be purchased only from suppliers approved by The Coca-Cola Company, which includes manufacturing subsidiaries of FEMSA Empaques. Prices for packaging materials historically are 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. Under the agreements with The Coca-Cola Company, Coca-Cola FEMSA may also use raw or refined sugar or HFCS as sweeteners in its products, although it currently use sugar in all of its operations except for Argentina. 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 it to pay in excess of international market prices for sugar. Coca-Cola FEMSA has experienced sugar price volatility in these territories as a result of changes in local conditions and regulations.
None of the materials or supplies that Coca-Cola FEMSA uses are presently in short supply, although the supply of specific materials could be adversely affected by strikes, weather conditions, governmental controls or national emergency situations.
Mexico. Coca-Cola FEMSA purchases some glass bottles, closures, plastic cases, commercial refrigerators, cans and certain lubricants and detergents for bottling lines from subsidiaries of FEMSA Empaques. It purchases returnable its plastic bottles from Continental PET Technologies de México, S.A. de C.V, a subsidiary of Continental Can, Inc., which has been the exclusive supplier of returnable plastic bottles to The Coca-Cola Company and its bottlers in Mexico. Coca-Cola FEMSA purchases some of its non-returnable plastic bottles, as well as pre-formed plastic ingots for the production of non-returnable plastic bottles, from ALPLA Fábrica de Plásticos, S.A. de C.V., which we refer to as ALPLA, an authorized provider of PET for The Coca-Cola Company.
Coca-Cola FEMSA purchases some can presentations from Industria Envasadora de Querétaro, S.A. de C.V., known as IEQSA, a bottler cooperative in which it holds 33.68% interest. Both Coca-Cola FEMSA and IEQSA purchase a portion of empty can supply requirements from Famosa. Coca-Cola FEMSA's supply agreements provide for market based pricing.
Sweeteners are combined with water to produce basic syrup, which is added to the concentrate as the sweetener for the soft drink. Coca-Cola FEMSA regularly purchases sugar from Promotora Mexicana de Embotelladoras, S.A. de C.V., known as PROMESA, a cooperative of Coca-Cola bottlers. These purchases are regularly made under one-year agreements between PROMESA and each bottler subsidiary for the sale of sugar at a price that is determined monthly based on the cost of sugar to PROMESA. Coca-Cola FEMSA also purchases sugar from Beta San Miguel, another sugar-cane producer in which it holds a 2.54% equity interest.
In December 2001, the Mexican government expropriated the sugar industry in Mexico. To administer this industry, the Mexican government entered into a trust agreement with Nacional Financiera, S.N.C., which we refer to as Nafin, a Mexican government-owned development bank, pursuant to which Nafin acts as trustee. In addition, the Mexican government imposed a 20% excise tax, effective January 1, 2002, on carbonated soft drinks sweetened with HFCS. As a result Coca-Cola FEMSA converted its Mexican bottler facilities to sugar-cane-based production in early 2002. On January 1, 2003, the Mexican government broadened the reach of this tax by imposing a 20% excise tax on carbonated soft drinks produced with non-sugar sweetener, including HFCS. The effect of these excise taxes is to limit Coca-Cola FEMSA's ability to substitute other sweeteners for sugar.
Imported sugar is also presently subject to import duties, the amount of which is set by the Mexican government. As a result, sugar prices in Mexico are in excess of international market prices for sugar and increased by approximately 8% in 2003.
Central America. The majority of Coca-Cola FEMSA's raw materials such as glass and plastic bottles and cans are purchased from several local suppliers. Sugar is available from one supplier in each country. Local sugar prices are significantly higher than international market prices, and Coca-Cola FEMSA's ability to import sugar or HFCS is limited.
Colombia. Coca-Cola FEMSA uses sugar as a sweetener in its products, which it buys from several domestic sources. It purchases pre-formed ingots from a local supplier and Tapón Corona, in which it has a 40% equity interest. Coca-Cola FEMSA purchases all its glass bottles and cans from suppliers, in which its competitor Postobón owns a 40% equity interest. Other suppliers exist for glass bottles, however, cans are available only from this one source.
Venezuela. Coca-Cola FEMSA uses sugar as a sweetener in its products, of which it purchases the majority from the local market and the rest it imports mainly from Colombia. In the second half of 2003, there was a shortage of sugar due to the inability of the main sugar importers to access foreign currencies as a result of the exchange controls implemented at the beginning of 2003. Coca-Cola FEMSA only buys glass bottles from one supplier, Productos de Vidrio, S.A., a local supplier, but there are other alternative suppliers authorized by The Coca-Cola Company. Coca-Cola FEMSA has several supplier options for plastic non-returnable bottles but it acquires most of its requirements from ALPLA de Venezuela, S.A. One exclusive supplier handles all of its can requirements.
Brazil. Sugar is widely available in Brazil at internal market prices which are generally lower than international prices. Coca-Cola FEMSA purchases glass bottles, PET bottles and cans from several domestic and international suppliers.
Argentina. In Argentina, Coca-Cola FEMSA uses HFCS from several different local suppliers as sweetener in its products instead of sugar. It purchases glass bottles, plastic trays and other raw materials from several domestic sources. Coca-Cola FEMSA purchases pre-formed plastic ingots, as well as returnable plastic bottles, at competitive prices from Complejo Industrial PET, S.A., which we refer to as CIPET, a local subsidiary of Embotelladera Andina S.A., a Coca Cola bottler with operations in Argentina, Chile and Brazil, and other international suppliers. Coca-Cola FEMSA purchases crown caps from local and international suppliers. It purchases its can presentations for distribution to customers in Buenos Aires from Complejo Industrial CAN S.A., which we refer to as CICAN, in which Coca-Cola FEMSA de Buenos Aires has a 48.1% equity interest.
Purchases from FEMSA Affiliates
Coca-Cola FEMSA regularly engages in transactions with FEMSA and its subsidiaries. In 2003, Coca-Cola FEMSA purchased crown caps, plastic bottle caps, cans, commercial refrigerators, lubricants, detergents, plastic cases and substantially all of its returnable glass bottle requirements for its Mexican operations from FEMSA Empaques under several supply agreements. A subsidiary of FEMSA Empaques also sells refrigerators to Coca-Cola FEMSA's non-Mexican operations. The aggregate amount of these purchases was approximately Ps. 1.513 billion in 2003. Coca-Cola FEMSA believes that its purchasing practices with FEMSA Empaques result in prices comparable to those that would be obtained in arm's length negotiations with unaffiliated parties. Coca-Cola FEMSA also sells its products to FEMSA Commercio's chain of convenience stores. These transactions are also conducted on an arm's length basis ..
FEMSA Cerveza
Overview and Background
FEMSA Cerveza is one of our core subholding companies and one of the two leading beer producers in Mexico measured in terms of sales volume. In 2003, FEMSA Cerveza sold 24.564 million hectoliters of beer. In 2003, FEMSA Cerveza was ranked the fourteenth-largest brewer in the world in terms of sales volume based on third party estimates. FEMSA Cerveza exports its products to more than 70 countries worldwide, with North America being its most important export market, followed by certain markets in Asia, Europe and Latin America. FEMSA Cerveza’s principal operating subsidiaries are Cervecería Cuauhtémoc Moctezuma, S.A. de C.V., which we refer to as CCM, and which operates six breweries, and Cervezas Cuauhtémoc Moctezuma, S.A. de C.V. which operates our company-owned distribution centers.
In September 1994, Labatt acquired 22% of FEMSA Cerveza for US$510 million and was granted an option to acquire an additional 8%. On December 1, 1994, FEMSA Cerveza and Labatt entered into a joint venture agreement whereby both parties agreed to combine their United States beer businesses through their joint ownership of Labatt USA. FEMSA Cerveza owns 30% of Labatt USA. In July 1995, Interbrew N.V./S.A., which we refer to as Interbrew, a Belgian holding company with extensive brewing interests worldwide, acquired Labatt. On May 15, 1998, Labatt, through its subsidiary, Stellamerica Holdings Limited, which we refer to as Stellamerica, exercised the option to acquire an additional 8% interest in FEMSA Cerveza for a total amount of US$221.6 million. Currently, Stellamerica holds 18.42% of FEMSA Cerveza, and Labatt holds 11.58%, therefore Interbrew indirectly owns 30% of FEMSA Cerveza.
On March 3, 2004, Interbrew and AmBev announced a transaction that would affect the ownership of the majority interest in the limited liability company that owns Labatt USA. Wisdom has commenced litigation in the United States District Court for the Southern District of New York alleging, among other things, that the transaction involves a transfer of membership or other ownership interests in the limited liability company that owns Labatt USA, and that such a transfer cannot occur without the approval of Wisdom or at least one of the Wisdom-appointed directors on the board of the limited liability company. See “Item 8. Financial Information––Legal Proceedings––FEMSA Cerveza.” In the event the transaction announced by Interbrew and AmBev were to be consummated, we believe the transaction would also involve a change of control, as that term is defined in certain agreements governing our relationship with Labatt. See "Item 10. Additional Information––Material Contracts––FEMSA Cerveza." We are currently in conversations with these parties to determine the future of our relationship with Labatt.
Business Strategy
FEMSA Cerveza’s objectives are to produce, market, distribute and sell quality beer products, expanding penetration in its core Mexican markets as well as in key export markets, particularly the southwestern or sun belt states of the United States. FEMSA Cerveza seeks to achieve profitable volume growth to ultimately generate economic value for its shareholders. In order to achieve these objectives in its core Mexican markets, FEMSA Cerveza is following a comprehensive strategy which seeks to:
| 1. | differentiate brand portfolios through market segmentation and brand positioning. After thorough analysis, portfolios have been tailored for each different market, leveraging the distinct attributes of FEMSA Cerveza’s various brands. |
| 2. | develop advanced capabilities to gather information at the point of sale, ensuring that appropriate products are being sold at the right price points, and allowing FEMSA Cerveza to fine-tune its portfolio offerings according to the market’s characteristics, which we refer to as revenue management competencies. |
| 3. | establish profitable, long-term relationships with retailers, by helping them to sell more product to the end consumer. FEMSA Cerveza implements customized client differentiation strategies that involve different commercial terms, promotional strategies, levels of refrigeration equipment and point of sale marketing materials to suit the individual retailer. |
| 4. | achieve balanced and profitable market coverage, by selecting the appropriate mix of on- and off-premise accounts, and a balance of image (such as an upscale restaurant) versus volume coverage accounts (such as beer depots). FEMSA Cerveza is committed to optimizing retail coverage and engaging solely in selective expansion with a priority on growing volumes profitably. |
| 5. | pursue continuously the maximization of efficiencies and cost reductions along the entire value chain, from production to final distribution, by using information technology and adapting processes accordingly. The implementation of FEMSA Cerveza’s comprehensive Enterprise Resource Planning solution is well advanced and it is allowing us to coordinate and optimize most of our processes, enabling the different components of our strategy to come together, with a goal of generating improved results. See “––Enterprise Resource Planning.” |
Product Overview
FEMSA Cerveza currently operates six breweries, all of which are located in Mexico, with an aggregate annual installed capacity of approximately 32.496 million hectoliters. In 2003, FEMSA Cerveza sold an aggregate volume of 24.564 million hectoliters, of which 22.582 million hectoliters were sold in the Mexican market and 1.982 million hectoliters were sold abroad. FEMSA Cerveza produces and distributes 15 brands of beer in up to ten different presentations, resulting in a portfolio of 61 different product offerings. The most important brands in FEMSA Cerveza’s portfolio include: Tecate, Carta Blanca, Sol and Superior. These four brands, all of which are distributed throughout Mexico, accounted for approximately 88% of FEMSA Cerveza’s domestic sales volume in 2003.
Per capita information, product segments, relative prices and packaging information with respect to FEMSA Cerveza have been computed and are based upon our statistics and assumptions.
The Mexican Beer Market
The Mexican beer market is the eighth largest beer market in the world in terms of industry sales volume in 2003 and is characterized by (i) a concentrated domestic beer production, (ii) regional market share differences, (iii) the prevalence of government licensing regulations, (iv) favorable demographics in the beer drinking population and (v) macroeconomic factors affecting the level of beer consumption.
| Concentrated domestic beer production |
Since 1985, Mexico has effectively had only two independent domestic beer
producers, FEMSA Cerveza and Grupo Modelo. Grupo Modelo, a publicly traded
company based in Mexico City, is the holding company of 76.8% of Diblo,
S.A. de C.V., which operates the brewing and packaging subsidiaries of
Grupo Modelo. Grupo Modelo’s principal beer brands are Corona, Modelo,
Victoria and Pacífico. Grupo Modelo’s Corona brand is distributed
nationally, while Victoria is distributed primarily in Mexico City and the
surrounding areas and Pacífico is sold principally along the pacific
coastal regions. Modelo Especial, Modelo Light and Pacífico are Grupo
Modelo’s domestic can presentations. In addition, Grupo Modelo produces
Corona in a can presentation for sale in export markets.
|
| Regional market share differences |
FEMSA Cerveza and Grupo Modelo each dominate the Mexican beer market in
separate regions of the country. FEMSA Cerveza has a dominant sales
position in the northern and southern areas of Mexico while Grupo Modelo
has a dominant sales position in central Mexico. We believe that this
regional domination can be traced in part to consumer loyalty to the brand
of beer that has historically been associated with a particular region.
For example, FEMSA Cerveza’s Carta Blanca brand was first produced in
Monterrey, Nuevo León in 1891. The strong regional identity in Monterrey
and surrounding northeastern areas is reflected in the region’s preference
for Carta Blanca and other FEMSA Cerveza brands.
|
Mexican Regional Demographic Statistics
| Percent of
2003 Total Population(1) |
Percent of Total 2003 GDP(1) |
Per Capita GDP 2003 (Thousands of Pesos) | |
| Region | |||
| Northern | 26.3% | 31.0% | Ps. 68.0 |
| Southern | 22.6 | 15.6 | 39.9 |
| Central | 51.1 | 53.4 | 60.5 |
| Country Total | 100.0% | 100.0% | Ps. 57.8 |
| Sources: Mexican Institute of Statistics and FEMSA Cerveza’s estimates. | |
| (1) | Estimated. |
| Government regulation |
The Mexican federal government regulates beer consumption in Mexico
primarily through taxation while local governments in Mexico regulate
primarily through the issuance of licenses that authorize retailers to
sell alcoholic beverages.
|
| Demographics of beer drinking population | We estimate that annual per capita beer consumption for the total Mexican
population increased to approximately 52 liters in 2003. The legal
drinking age in Mexico is 18. At least 38% of the Mexican population is
under the age of 18 and, therefore, is not considered to be part of the
beer drinking population. We consider the population segment of men
between the ages of 18 and 45 to be FEMSA Cerveza’s primary market.
|
| Macroeconomic influences affecting beer consumption |
We believe that consumption activity in the Mexican beer market is heavily influenced by the general level of economic activity in Mexico, the country’s gross wage base, changes in real disposable income and employment levels. As a result, the beer industry reacts sharply to economic change. The industry generally experiences high volume growth in periods of economic strength and slower volume growth or volume contraction in periods of economic weakness. Domestic beer sales declined in 1982, 1983 and 1995. These sales decreases correspond to periods in which the Mexican economy experienced severe disruptions. Similarly, the economic weakness observed in 2001 and 2002 corresponds to a reduction in domestic beer sales in 2002. In 2003, given the effect of a continued economic slowdown on consumers, FEMSA Cerveza decided not to increase prices. This reduction in prices in real terms (after giving effect to inflation) was the main driver for increasing sales volumes during 2003. |
Annual Price Increases
FEMSA Cerveza did not implement a general price increase during 2003, reflecting the difficult economic environment. For the Mexican beer industry as a whole, the real average retail price of beer decreased 3.8 percentage points as shown below:
Mexican Beer
Industry
Cumulative Real Retail Beer Price Index: 1999-2003
(1999 = 100%)
| Year Ended December 31, | ||||
| 2003 | 2002 | 2001 | 2000 | 1999 |
| 101.5 | 105.3 | 105.0 | 104.9 | 100.0 |
| __________________ | |
| Source: Banco de México | |
In February 2004, FEMSA Cerveza started a price increase representing an average 5% nominal price increase as compared to December 2003.
FEMSA Cerveza’s Beer Sales Volume
FEMSA Cerveza volume figures contained in this annual report refer to invoiced sales volume. Invoiced sales volume represents the quantity of hectoliters of beer sold by FEMSA Cerveza’s breweries to unaffiliated distributors and by affiliated distributors to retailers. The term hectoliter means 100 liters or approximately 26.4 U.S. gallons.
FEMSA Cerveza’s aggregate beer sales volume totaled 24.564 million hectoliters in 2003, an increase of 3.2% from total sales volume of 23.811 million hectoliters in 2002. In 2003, FEMSA Cerveza’s domestic sales volume increased by 3.3% to 22.582 million hectoliters and export sales volume increased by 1.4% to 1.982 million hectoliters.
FEMSA Cerveza Beer
Sales Volumes
(Thousands of Hectoliters)
| 2003 | 2002 | 2001 | 2000 | 1999 | |
| Domestic Sales Volume | 22,582 | 21,856 | 22,018 | 21,868 | 22,197 |
| Export Sales Volume | 1,982 | 1,955 | 1,843 | 1,728 | 1,511 |
| Total Sales Volume | 24,564 | 23,811 | 23,861 | 23,596 | 23,708 |
FEMSA Cerveza’s domestic sales volume recorded a five-year compounded average growth rate of 0.4% for the period 1999-2003. This compares with the 2.1% five-year compounded average growth rate of the Mexican GDP. Domestic net sales for the same period recorded a 2.1% compounded average growth rate. Currently, FEMSA Cerveza’s strategy continues to focus on increasing consumption of its products while improving the real price of beer through revenue management strategies.
FEMSA Cerveza’s Beer Presentations
FEMSA Cerveza produces beer in returnable glass bottles and kegs and in non-returnable metal cans and glass bottles. The following table shows the percent of total sales volume by presentation for the year ended December 31, 2003:
FEMSA Cerveza’s
Total Beer Volume by Presentation
As of
December 31, 2003
| Presentation | |
| Returnable Bottle—325 ml | 23.4% |
| Returnable Bottle—1 liter | 38.4 |
| Returnable Bottle—190 ml | 5.2 |
| Subtotal Returnable Bottles | 67.0 |
| Non-returnable Bottle—325 ml and 190 ml | 8.1 |
| Cans | 23.1 |
| Kegs | 1.8 |
| Total | 100.0% |
| Returnable presentations | The most popular form of packaging in the Mexican beer market is the returnable bottle. FEMSA Cerveza believes that the popularity of the returnable bottle is attributable to its lower price to the consumer. While returnable bottles generally cost approximately twice as much to produce as non-returnable bottles, returnable bottles may be reused as many as 30 times before being recycled. As a result, beer producers are able to charge lower prices for beer in returnable bottles. Because non-returnable presentations are the most expensive, we believe that demand for these presentations is highly sensitive to economic factors. During periods when the Mexican economy is weak, returnable volumes generally increase at the expense of non-returnable volumes. |
| Non-returnable presentations | FEMSA Cerveza’s domestic presentation mix has been growing in non-returnable presentations in the last few years, as we tailor our offering to consumer preferences and provide different convenient alternatives. |
Relative Pricing in the Mexican Market
Returnable bottles and kegs are the least expensive beer presentation on a per-milliliter basis. Cans have historically been priced approximately 40% higher than returnable bottles, and non-returnable bottles are generally priced approximately 30% higher than returnable bottles. The consumer preference for presentations in cans has varied considerably over the past 20 years, rising in periods of economic prosperity and declining in periods of economic austerity, reflecting the price differential between these forms of packaging.
In 2003, FEMSA Cerveza increased slightly the relative price of its non-returnable presentations as compared to the 325 milliliters returnable glass presentation. The relative price of the can presentation and the non-returnable glass presentation as compared to the 325 milliliters returnable glass presentation was 1.38 and 1.28, respectively, as of December 31, 2003. In February 2004 FEMSA Cerveza started a price increase differentiated by region, brand and presentation that was fully implemented by the first week of March. This represents an average 5% nominal price increase as compared to December 2003.
Domestic Beer
Relative Pricing by Presentation
As of
December 31, 2003
| Presentation | Relative Prices (1) |
| Returnable Bottle—325 ml | 1.00 |
| Returnable Bottle—1 liter | 0.90 |
| Returnable Bottle—190 ml | 1.14 |
| Non-Returnable Bottle—325 ml and 190 ml | 1.28 |
| Cans | 1.38 |
| Kegs | 0.99 |
| __________________ | |
| (1) | Relative prices are based on information provided by FEMSA Cerveza with respect to its products and reflect wholesale prices excluding taxes. The 325 ml. returnable bottle was used as the reference price for calculating relative prices. |
Exports
FEMSA Cerveza’s export strategy focuses on the United States market, concentrating efforts on the markets in the sun belt states bordering Mexico. We believe that the sun belt states are FEMSA Cerveza’s greatest potential market outside of Mexico.
Total export sales volume of 1.982 million hectoliters represented 8.1% of FEMSA Cerveza’s total beer sales volume in 2003 and accounted for 6.7% of FEMSA Cerveza’s total revenues. The following table highlights FEMSA Cerveza’s export volumes and total revenues:
FEMSA Cerveza Export Summary
| Year Ended December 31, | |||||
| 2003 | 2002 | 2001 | 2000 | 1999 | |
| Export Sales Volume(1) | 1,982 | 1,955 | 1,843 | 1,728 | 1,511 |
| Volume Growth | 1.4% | 6.1% | 6.6% | 14.4% | 14.3% |
| Percent of Total Sales Volume | 8.1% | 8.2% | 7.7% | 7.3% | 6.4% |
| Export Revenues | |||||
| Millions of Pesos(2) | 1,467 | 1,327 | 1,279 | 1,293 | 1,246 |
| Millions of U.S. dollars(3) | 133 | 127 | 123 | 115 | 101 |
| Revenue Growth (US$) | 4.6% | 3.7% | 7.3% | 13.8% | 14.3% |
| Percent of Total Sales | 6.7% | 6.2% | 5.9% | 6.4% | 6.4% |
| __________________ Source: FEMSA Cerveza. | |
| (1) | Thousands of hectoliters. |
| (2) | Constant Pesos as of December 31, 2003. |
| (3) | Export revenues are invoiced and collected in U.S. dollars. |
FEMSA Cerveza currently exports its products to more than 70 countries. The principal export markets for FEMSA Cerveza are North America, Europe, Asia and Latin America. In 2003, export sales volume to these areas accounted for 91.9%, 2.9%, 2.3% and 2.9%, respectively, of FEMSA Cerveza’s total export sales volume.
FEMSA Cerveza’s affiliate, Labatt USA, is the importer of FEMSA Cerveza’s brands in the United States. Labatt USA manufactures and distributes Rolling Rock and is also the U.S. importer of Labatt’s Canadian brands and of European brands such as Lowenbrau, Stella Artois, Boddingtons, Leffe and Carlsberg. Sales of FEMSA Cerveza’s brands contributed 35% of Labatt USA’s volume in 2003, representing 1% volume growth from 2002 levels.
On April 9, 2003, FEMSA and Interbrew jointly announced that Labatt USA would introduce Bass Ale into its portfolio of brands for a twelve to eighteen month trial period beginning July 1, 2003. On December 19, 2003 the trial period was extended for an additional 6-month period. This temporary arrangement gives Labatt USA distribution and marketing responsibility for Bass Ale in the United States, and also gives Labatt USA an eighteen to twenty-four month period to establish the best development plan for the brand in the United States. During the period of the agreement, Labatt USA and its shareholders, Interbrew and FEMSA Cerveza, will continue to assess the desirability of a longer-term arrangement for Labatt USA to serve as the United States distributor of Bass Ale. This agreement also allows the existing core brands of the Labatt USA portfolio to benefit from incremental marketing support and sales resources.
In August 2002, FEMSA Cerveza began licensing the production and distribution of its Sol brand to Holsten-Brauerei AG, which we refer to as Holsten, a Hamburg-based brewer. This venture enables FEMSA Cerveza to leverage Holsten’s extensive knowledge of the German beer market and offer a fresher product to a wider audience, while still complying with the exact quality specifications of the Mexican brew. In 2002, Holsten distributed the existing inventory of Sol in Germany and began brewing and distributing the brand in 2003.
FEMSA Cerveza’s principal export brands are Tecate, XX Lager, Dos Equis (Amber) and Sol. These brands collectively accounted for 94% of FEMSA Cerveza’s export sales volume for the year ended December 31, 2003.
FEMSA Cerveza’s
Principal Export Brands
Year Ended December 31,
2003
| Brand | Percent of Total Export Volume |
| Tecate | 58.4% |
| XX Lager and Dos Equis (Amber) | 23.7 |
| Sol | 11.6 |
| Bohemia | 2.2 |
| Carta Blanca | 4.1 |
| Total | 100.0% |
Primary Distribution
FEMSA Cerveza’s primary distribution is from its production facilities to its distribution centers’ warehouses. FEMSA Cerveza delivers to a combination of company-owned and third-party distributors. In 2003, approximately 75% of FEMSA Cerveza’s domestic sales passed through 273 company-owned distribution centers. The remaining 25% was sold through 90 independent distributors operating under agreements with FEMSA Cerveza. In an effort to improve the efficiency and alignment of the distribution network, FEMSA Cerveza is adjusting its relationship with independent distributors by implementing franchise agreements and as a result, achieving economies of scale through alignment with FEMSA Cerveza’s operating systems. FEMSA Cerveza has also increased the number of company-owned distributors by acquiring third party distributors in recent years. A franchise agreement is offered only to those distributors that meet certain standards of operating capabilities, performance and alignment. FEMSA Cerveza has already and will eventually acquire those distributors that do not meet these requirements. Through this initiative FEMSA Cerveza will continue to seek to increase its volume through company-owned distribution centers.
Retail Distribution
The main sales outlets for beer in Mexico are small, independently-owned “mom and pop” grocery stores, dedicated beer stores or “depósitos,” liquor stores and bars. Supermarkets account for only a small percentage of beer sales in Mexico. In addition, FEMSA Comercio operates a chain of more than 2,798 convenience stores under the trade name Oxxo that exclusively sell FEMSA Cerveza’s brands.
Distribution of
FEMSA Cerveza Domestic Sales Volume By Outlet
Year Ended December 31, 2003
| Points of Sale | |
| Small Grocery Stores | 21.3 |
| Beer and Liquor Stores | 31.9 |
| Mini-markets and Convenience Stores | 16.0 |
| Other Points of Sale | 9.8 |
| Subtotal | 79.0 |
| Consumption Centers | |
| Bars | 9.7 |
| Restaurants | 4.9 |
| Nightclubs | 2.1 |
| Other Consumption Centers | 4.3 |
| Subtotal | 21.0 |
| Total | 100.0% |
In 2001, FEMSA Cerveza began implementing pre-sale processes. For 2003, approximately 80% of our sales volume was sold through pre-sale, which consists of systematic on-site visits to collect advance orders. One of the primary objectives of pre-sale is to separate sales from distribution to ensure more reliable market access and to enhance efficiency by reducing the number of secondary distribution routes in otherwise highly fragmented markets. Overall, in markets where pre-sale has been implemented, we have experienced a significant reduction in unsold product and a net reduction in distribution personnel. Furthermore, pre-sale has enabled FEMSA Cerveza to collect customer and consumer information directly from the marketplace, which then becomes valuable in defining brand portfolios by channel. See “—Marketing Strategy.”
The Mexican retail market is fragmented and characterized by a preponderance of small outlets that are unable and unwilling to maintain meaningful inventory levels. Consequently, FEMSA Cerveza must make frequent product deliveries to its retailers. The existence of pre-sale systems facilitates systematic product delivery and helps discipline product inventory at the point of sale. As of December 31, 2003, FEMSA Cerveza serves more than 265,000 retailers and its distribution network operates approximately 1,926 retail distribution routes. This is slightly lower than the number of routes in operation in 2002 (without considering 176 routes acquired from third parties distributors during 2003), and reflects the reconfiguration in distribution logistics as a result of the implementation of pre-sale in many of our key markets.
Enterprise Resource Planning
Since 2001, FEMSA Cerveza has embarked on the implementation of an Enterprise Resource Planning or ERP system at various levels of the organization, with the ultimate objective of possessing an information and control platform that supports all commercial activities nationwide and correlates them with the administrative and business development decision-making process occurring in our central office. The ERP system has gone through a development phase in which the design, organization and configuration of various components of the system have been evaluated. In this phase, special care has been given to defining functions and procedures, which in some cases have spanned departmental divisions, in order to produce a cohesive set of operating processes. Some basic modules have been implemented successfully and according to schedule both at our central office and throughout the company. These modules assist finance, shared services, maintenance and equipment functions, among others. These ERP modules operate under the SAP®software platform.
In 2003, we started the rollout of the ERP commercial module in our company-owned distribution centers. By the end of 2003, approximately 36% of the company-owned distribution centers’ volume were operating through ERP. As we advance in the implementation process, we are also working in increasing our personnel capabilities in order to take advantage of the new tools and improve our decision-making processes. FEMSA Cerveza expects that this percentage will continue to increase and that implementation will be completed during 2005.
Marketing Strategy
The principal marketing objectives of FEMSA Cerveza are:
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ensuring coherence between point of sale marketing and sales activities by linking the promotional programs of each brand with their respective communication and advertising campaigns;
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exploiting channel marketing and market research functions;
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defining and implementing differentiated strategies to promote the image of each brand; and
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capturing new sales or consumption opportunities through innovative solutions in product and package offering, refrigeration, visibility and sponsorships.
Focus on Consumer: Brand Positioning and Market Segmentation
FEMSA Cerveza’s marketing strategy relies on a diverse brand and presentation portfolio to effectively serve all consumer and geographic segments of the Mexican beer market. FEMSA Cerveza’s product portfolio consists of brands at different stages of market development. The strategy for each brand is dictated by its potential to either capture additional consumers or increase frequency of consumption in each market. The objective of FEMSA Cerveza’s marketing is to position each of its four major brands as the principal brand in the respective region of relative strength. Our leading brands in their targeted domestic markets are Tecate in the northwest, Carta Blanca in the northeast, Sol in the central region and Superior in the south. FEMSA Cerveza believes that this strategy allows it to leverage the brand equity and market position of its products in their respective territories. In addition, FEMSA Cerveza plans to use other brands in its portfolio to complement, and thereby strengthen, its regional offering and to assist in creating a richer pricing scheme.
By defining brand positioning and the relevant promotional strategies to be executed by the sales team, FEMSA Cerveza’s marketing efforts seek to establish connections between the consumer and FEMSA Cerveza’s brands. The brand architecture and concept derived from brand positioning are founded on rigorous market research that evaluates, among other things, the brand’s attributes from the consumer’s perspective. Furthermore, periodic market research is conducted in several markets to monitor brand health attributes—such as brand awareness, recent trial, purchase intent and first favorite—to help FEMSA Cerveza keep accurate track of the status of the image of each brand. The branding specialists also rely on this market-obtained data to better target products and promotions.
Focus on Retailer: Channel Marketing
FEMSA Cerveza believes that defining channel strategies is just as important as defining brand positioning. Therefore, FEMSA Cerveza has established a channel marketing function within the marketing division with the objective of understanding the strategic relevance of the different channels across markets in order to define brand portfolios per channel. A channel refers to a category or sub-category of point of sale, such as supermarkets, beer depots, restaurants, etc. Channel marketing is responsible for:
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establishing the optimal promotional programs for each channel;
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identifying the most effective combination and position for merchandising material; and
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providing refrigeration equipment at the point of sale.
Channel marketing is also responsible for new channel development that could foster additional consumption opportunities for FEMSA Cerveza’s brands.
Channel marketing and coverage will be strengthened considerably with the use of electronic maps of certain cities. These maps superimpose crucial information—socioeconomic strata, micro market share, outlet location and channel characteristics—allowing sales managers and marketing strategists to implement differentiated tactics such as revenue management and portfolio segmentation. FEMSA Cerveza is in the initial development stages of this sales tool.
Integrated Marketing
With the objective of further aligning the brand and channel strategies with the sales teams, FEMSA Cerveza began implementing integrated marketing programs that combine the functions of the sales and marketing divisions. An integrated marketing program promotes a brand through simultaneous deployment of media communications, intense marketing efforts and sponsorship of events, increasing the effectiveness of the sales force by bridging the gap between the brand and the channel.
Jointly, our brand and channel experts define an integrated brand strategy, which will be implemented in each type of market and in each designated channel by a specialized team responsible for designing the communication and marketing materials, including promotional programs that reflect the brand’s strategy. FEMSA Cerveza utilizes the following forms of sales promotion: television, radio, billboards and point of sale material, as well as channel specific promotions, promotional material, refrigeration equipment and branded merchandise such as plastic furniture and neon signs to dress the point of sale. The implementation team is responsible for the delivery of the specific brand programs to the sales force, which is ultimately responsible for their market execution.
Product and Package Innovation
FEMSA Cerveza has established a working system that identifies, develops and ultimately launches product/package innovation alternatives to create incremental volume and value for its business. This system has a structured set of components —functions and criteria— to help innovative ideas materialize into feasible rollouts in an optimal way. Currently, the product development initiatives at FEMSA Cerveza do not contemplate the introduction of new brands or the retirement of existing ones.
Plants and Facilities
FEMSA Cerveza currently operates six breweries with an aggregate monthly production capacity of 2,708 thousand hectoliters, equivalent to approximately 32.5 million hectoliters of annual capacity. Each of FEMSA Cerveza’s breweries has received ISO 9002 certification and a Clean Industry Certification (Industria Limpia) given by Mexican environmental authorities. A key consideration in the selection of a site for a brewery is its proximity to potential markets, as the cost of transportation is a critical component of the overall cost of beer to the consumer. FEMSA Cerveza’s breweries are strategically located across the country to better serve FEMSA Cerveza’s distribution system.
FEMSA Cerveza
Facility Capacity Summary
(Thousands of
Hectoliters)
Year Ended December 31, 2003
| Average Annualized | |
| Brewery | |
| Orizaba | 7,200 |
| Monterrey | 7,800 |
| Toluca | 5,400 |
| Navojoa | 4,200 |
| Tecate | 4,680 |
| Guadalajara | 3,216 |
| Total | 32,496 |
| Average capacity utilization | 73.8% |
Between 1999 and 2003, FEMSA Cerveza increased its average monthly production capacity by approximately 210,000 hectoliters through additional investments in existing facilities. During 2003, FEMSA Cerveza expanded average monthly capacity in the Monterrey brewery to achieve a production of 650,000 hectoliters. FEMSA Cerveza’s management believes that it will be able to continue to adequately expand its production capacity by investing in existing facilities.
FEMSA Cerveza operates seven effluent water treatment systems to treat the water used by the breweries, all of which are wholly owned by FEMSA Cerveza except for the effluent treatment system at the Orizaba brewery, which is a joint venture among FEMSA Cerveza, several other local companies and the government of the state of Veracruz.
Seasonality
Demand for FEMSA Cerveza’s beer is highest in the Mexican summer season, and consequently, brewery utilization rates are at their highest during this period. Demand for FEMSA Cerveza’s products decreases during the months of November, January and February primarily as a result of colder weather in the northern regions of Mexico. Demand for FEMSA Cerveza’s products tends to increase in the month of December reflecting consumption during the holiday season.
Raw Materials
Malted barley, hops, certain grains, yeast and water represent the principal ingredients used in manufacturing FEMSA Cerveza’s beer products. These inputs are generally available in the open market. FEMSA Cerveza satisfies its commodity requirements through purchases from various sources, including purchases pursuant to contractual arrangements and purchases in the open market. The prices and supply sources of raw materials are determined by, among other factors, the level of crop production, weather conditions, export demand and government regulations and legislation affecting agriculture. Hops is the only ingredient that is not available domestically. FEMSA Cerveza imports hops primarily from the United States and Europe.
The principal source of barley for the Mexican beer industry is the domestic harvest. If domestic production is insufficient to meet the industry’s requirements, barley (or its equivalent in malt), can be sourced from the international markets. Before 2003, pursuant to NAFTA, an annual duty-free import quota for barley (or its equivalent in malt) was set. Beginning in 2003, under NAFTA, barley imports from the U.S. and Canada are tax free and there are no import quota restrictions. Domestic barley production increased significantly in 2003, and as a consequence we believe that imports have experienced an important reduction. Prior to NAFTA, domestic barley prices were significantly higher than international barley prices. Since the implementation of NAFTA, domestic barley prices have declined, and local producers now generally price their crop so that, after accounting for transportation and other import-related expenses, imported barley and barley purchased from the domestic market result in the same cost to the domestic purchaser.
Purchases from FEMSA Empaques
FEMSA Cerveza obtains its packaging materials primarily from its affiliate, FEMSA Empaques. In 1994, FEMSA Cerveza’s principal operating subsidiaries entered into a packaging supply agreement with FEMSA Empaques. See “—FEMSA Empaques” and “Item 10. Additional Information—Material Contracts—FEMSA Cerveza—Packaging Supply Agreement.” As of December 31, 2003, FEMSA Empaques supplied 100% of FEMSA Cerveza’s bottle, aluminum can, bottle cap and label requirements.
FEMSA Comercio
Overview and Background
FEMSA Comercio operates the largest chain of convenience stores in Mexico, measured in terms of number of stores, under the trade name Oxxo. As of December 31, 2003, FEMSA Comercio operated 2,798 Oxxo stores located in 25 states of the country, with a particularly strong presence in the northern part of Mexico.
FEMSA Comercio, the largest single customer of FEMSA Cerveza 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 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 2003, sales of beer through Oxxo represented 5.4% of FEMSA Cerveza’s domestic sales volume as well as approximately 12.8% of FEMSA Comercio’s revenues. A typical Oxxo store carries 2,723 different SKUs in 37 main product categories, representing a significant increase in the product offering historically distributed in Oxxo stores.
In recent years, FEMSA Comercio has gained importance as an effective distribution channel for our beverage products, as well as a rapidly growing point of contact with our end consumers. Based on our 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, we have focused on a strategy of rapid, profitable growth. We continue to add selling space across the northern border of Mexico, even as macroeconomic variables have weakened in some parts of the country, particularly along the Mexican northern border with the United States, in furtherance of our long-term view of our businesses. FEMSA Comercio opened 297, 437 and 582 net new Oxxo stores in 2001, 2002 and 2003, respectively. The accelerated expansion yielded total revenue growth of 25.3% to reach Ps. 16.601 billion in 2003, while same store sales increased 8.2%, which was considerably above the retail industry average. FEMSA Comercio served approximately 628 million customers in 2003 compared to 505 million in 2002.
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 ERP technology to improve its ability to capture customer information from its existing stores and to improve its overall operating performance. Approximately 97% of the products carried through Oxxo stores are bar-coded, and 100% of the Oxxo stores are equipped with point of sale systems that are integrated into a company-wide computer network.
FEMSA Comercio has adopted innovative promotional strategies in order to increase store traffic and sales. In particular, FEMSA Comercio prices 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 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 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.
To implement revenue management strategies, FEMSA Comercio created a division in charge of product category management, such as beverages, fast food and perishables, to enhance and better utilize its consumer information base and market intelligence capabilities. FEMSA Comercio is implementing an ERP system, which will allow FEMSA Comercio to redesign its key operating processes and enhance the usefulness of its market information going forward.
Store Locations
With 2,798 Oxxo stores in Mexico as of December 31, 2003, 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 central Mexico and the Gulf coast.
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 Oxxo Stores
| Year Ended December 31, | |||||
| 2003 | 2002 | 2001 | 2000 | 1999 | |
| Total Oxxo Stores | 2,798 | 2,216 | 1,779 | 1,482 | 1,225 |
| Store Growth (%) | 26.3% | 24.6% | 20.0% | 21.0% | 19.3% |
FEMSA Comercio 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 1999 and December 31, 2003, a period during which the total number of stores increased by 1,573, 1,647 new stores were opened and 74 stores were closed.
Competition
Oxxo competes in the convenience store segment of the retail market with 7-Eleven, Super Extra and Circle-K, AM/PM, as well as other local brands of convenience stores. The format of these stores is similar to the format of the Oxxo stores. Based on an internal market survey conducted by FEMSA Comercio, management believes that, as of December 31, 2003, there were approximately 4,610 stores in Mexico that could be considered part of a convenience store segment of the retail market or network. Oxxo is the largest chain in Mexico, operating more than half of these stores. Furthermore, FEMSA Comercio operates in 25 states and has much broader geographical coverage than any of its competitors.
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, stores near schools and universities, along with other types of specialized locations.
Approximately 71% of Oxxo’s clientele is between the ages of 15 and 35. FEMSA Comercio also segments the market according to demographic criteria, including income level.
Store Characteristics
The average size of an Oxxo store is approximately 114 square meters of selling space, excluding space dedicated to refrigeration, storage or parking. The average constructed area of a store is approximately 183 square meters and, when parking areas are included, the average store size increases to approximately 415 square meters.
FEMSA Comercio—Operating Indicators
| Year Ended December 31, (percentage change against previous year) | |||||
| 2003 | 2002 | 2001 | 2000 | 1999 | |
| Total Store Sales | 25.3% | 18.7% | 19.8% | 28.4% | 19.2% |
| Same-Store Sales(1) | 8.2% | 6.0% | 6.4% | 13.4% | 9.9% |
| Beer-related data: | (percentage of total) | ||||
| Beer sales as % of total store sales | 12.8% | 13.3% | 13.6% | 14.0% | 14.7% |
| Oxxo store sales as a % of | |||||
| FEMSA Cerveza’s volume | 5.4% | 4.5% | 3.9% | 3.7% | 3.0% |
| (1) | Same-store sales growth is calculated by comparing the sales of stores for each year that have been in operation for at least thirteen months with the sales of those same stores during the previous year. |
Beer, telephone cards, soft drinks and cigarettes represent the main product categories for Oxxo stores. FEMSA Comercio has a distribution agreement with FEMSA Cerveza. As a result of this agreement, Oxxo stores only carry beer brands produced by FEMSA Cerveza. See “Item 10. Additional Information—Material Contracts—FEMSA Cerveza.” 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. In 2001, a limited number of Oxxo stores commenced the sale of Pepsi products in certain cities in northern Mexico, as part of a defensive competitive strategy.
Approximately 90% of the 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. 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 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 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 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 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, almost 78.7% of the products carried by the Oxxo chain 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 six regional warehouses located in Monterrey, Mexico City, Guadalajara, Mexicali, Mérida and León. The distribution centers operate a fleet of 120 trucks that make deliveries to each store approximately every 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.
Other Stores
FEMSA Comercio also operates a small number of stores under the names Bara, Six and Matador.
FEMSA Empaques
Business Overview
Our packaging operations are handled through, FEMSA Empaques, the operating subsidiaries of which manufacture and distribute a wide variety of packaging solutions to the beverage industry primarily in Mexico. FEMSA Empaques has 12 production facilities and 29 service centers throughout Mexico and conducts operations primarily through two main subsidiaries: Famosa, which manufactures aluminum beverage cans and ends, and crown caps and closures; and Silices de Veracruz, S.A., which we refer to as Sivesa, which manufactures glass beverage bottles. We also manufacture commercial refrigeration equipment through Vendo de Mexico, S.A. de C.V., which we refer to as Vendo, flexible packaging materials through Grafo Regia S.A. de C.V., which we refer to as Grafo Regia, and other items such as plastics and chemical products. We announced on October 23, 2003 that FEMSA Empaques would become part of FEMSA Strategic Procurement, which we refer to as Strategic Procurement and which will coordinate procurement efforts across FEMSA.
Business Strategy
Within the FEMSA business portfolio, FEMSA Empaques performs a relevant role as it supplies essential packaging materials, particularly for our beverage operations. We have determined that certain operations within FEMSA Empaques, namely glass, cans, crown caps and closures and commercial refrigerators, are essential for our core beverage operations. Furthermore, the structure of the industry for some of these products warrants our ownership of these businesses to balance pricing and supply conditions in order to adequately support our beverage operations. For example, our main competitor in the Mexican beer market is also one of the largest packaging producers in Mexico. Therefore, we are committed to keeping those operations as part of our business going forward.
Certain other operations, such as labels and flexible packaging, plastics and chemical products, face more competitive conditions in their respective industries and are relatively less relevant to our core operations, and therefore, we have indicated our intention to divest those operations as opportunities present themselves. The price, terms and timing of these divestitures have not been established.
The primary objective of FEMSA Empaques is to provide our beer and soft drink subsidiaries with high-quality packaging materials at competitive prices. To maximize our operations, FEMSA Empaques also provides packaging materials to unaffiliated third parties. FEMSA Empaques places particular emphasis on reducing costs through productivity gains and resource conservation initiatives, providing customers with technical service as a means of ensuring production quality and competitive differentiation and investing in human and capital resources to facilitate cost reduction and competitiveness.
Customers
In 2003, sales to affiliates represented 57.5% of FEMSA Empaques’ total revenues of Ps. 7.352 billion. While sales to affiliates are still the most significant portion of FEMSA Empaques’ business, it has increased its penetration with unaffiliated third parties in recent years to improve capacity utilization and to continue to reduce the cost of packaging products for its beverage affiliates.
Currently, FEMSA Empaques’ main third-party customers include unaffiliated Coca-Cola bottlers, Casa Pedro Domecq, S.A. de C.V., Compañía Nestlé, S.A. de C.V., Labatt, Miller Brewing Co. and Coors Brewing Company. In 2003, more than 70.8% of FEMSA Empaques’ sales of crown caps were sold to unaffiliated third parties. In addition, FEMSA Empaques believes that it has developed a significant presence in the export market. In 2003, approximately 12.0% of FEMSA Empaques’ total revenues were generated through export sales.
The following table sets forth an allocation of FEMSA Empaques’ revenues by product and client category:
FEMSA Empaques—Revenue Allocation by Product and Client
| Year Ended December 31, | |||||
| 2003 | 2002 | 2001 | 2000 | 1999 | |
| Product Categories: |
|||||
| Beverage Cans | 33.4% | 32.7% | 32.4% | 36.6% | 35.8% |
| Crown Caps | 10.0 | 10.5 | 10.8 | 10.3 | 9.0 |
| Glass Bottles | 20.2 | 22.0 | 20.5 | 19.0 | 19.9 |
| Commercial Refrigerators | 11.1 | 9.3 | 12.4 | 10.7 | 8.2 |
| Labels and Flexible Packaging | 8.0 | 9.8 | 9.1 | 8.6 | 7.0 |
| Other(1) | 17.3 | 15.7 | 14.8 | 14.8 | 20.1(2) |
| Total Revenues | 100.0% | 100.0% | 100.0% | 100.0% | 100.0% |
| Client Categories: | |||||
| Coca-Cola FEMSA | 17.8% | 17.4% | 12.9% | 14.6% | 11.6% |
| FEMSA Cerveza | 39.7 | 40.9 | 43.5 | 38.8 | 40.2 |
| Third Parties | 42.5 | 41.7 | 43.6 | 46.6 | 48.2 |
| Domestic | 30.4 | 30.6 | 33.8 | 36.1 | 40.2 |
| Export | 12.0 | 11.1 | 9.8 | 10.5 | 8.0 |
| Total Revenues | 100.0% | 100.0% | 100.0% | 100.0% | 100.0% |
| __________________ | |
| (1) | Other includes food cans, chemical products and plastic products. |
| (2) | Includes paper and cardboard, which was produced until 1999. |
Capital Investments
Over the past five years, we have invested approximately Ps. 1.2 billion in capital improvements and expansion projects at FEMSA Empaques. These projects have included the expansion of can and can-lid capacity, and most recently, a major refurbishment of a furnace to produce glass bottles. We believe that these investments, coupled with ongoing efforts to reduce costs and streamline operating processes, have resulted in significant productivity gains by FEMSA Empaques. However, we maintain that current and future capital investments in FEMSA Empaques will be primarily determined by the packaging requirements of our beverage subsidiaries.
Principal Products
Beverage Cans
FEMSA Empaques’ activities in the beverage can segment are oriented towards the beer, soft drink and juice industries. FEMSA Empaques’ oldest operating subsidiary, Famosa, was established in 1936 to supply crown caps to the Cuauhtémoc brewery. Famosa operates six production lines, four that produce aluminum beverage can bodies at our production facilities in Ensenada and Toluca, and two that produce can ends at our production facility in Monterrey. Aggregate annual production capacity for beverage cans at our production facilities in Ensenada and Toluca is approximately 3.2 billion cans and capacity utilization was approximately 97.4% in 2003. Aggregate annual production capacity for can ends at our production facility in Monterrey was approximately 4.2 billion can ends, and average capacity utilization was 82.1% in 2003.
We believe that Famosa’s production facilities utilize state of the art technology. Famosa has a technology exchange agreement with Ball Corporation, which we refer to as Ball, for the licensing and cross-licensing of beer and soft drink can technology. Ball has recognized FEMSA Empaques’ Monterrey and Ensenada can production facilities as the benchmark for Ball’s licensees worldwide. See “Item 10. Additional Information—Material Contracts—FEMSA Empaques—Ball Licensing Agreement.”
FEMSA Empaques is the largest Mexican beverage can manufacturer based on sales volume in 2003. The following table sets forth an allocation of FEMSA Empaques’ sales volume by client category:
FEMSA Empaques—Beverage Can Volume
| Year Ended December 31, | |||||
| 2003 | 2002 | 2001 | 2000 | 1999 | |
| Beverage can sales volume (in Millions of units) | 3,231 | 3,000 | 2,808 | 3,001 | 3,216 |
| Client Categories: | |||||
| FEMSA Cerveza | 46.3% | 45.7% | 50.5% | 44.9% | 43.5% |
| Coca-Cola FEMSA | 12.0 | 11.0 | 6.7 | 12.6 | 9.7 |
| Third parties | 41.7 | 43.3 | 42.8 | 42.5 | 46.8 |
| Domestic | 23.7 | 28.9 | 35.1 | 33.7 | 40.6 |
| Export | 18.0 | 14.4 | 7.7 | 8.8 | 6.2 |
| Total Sales Volume | 100.0% | 100.0% | 100.0% | 100.0% | 100.0% |
Crown Caps and Closures
In addition to can ends, in 2003 Famosa operates 10 crown cap production lines in Monterrey with an annual production capacity of approximately 16.4 billion crown caps. In 2003, capacity utilization was approximately 87.3%.
The principal clients for crown caps and closures are the domestic and international beverage industries. Demand for crown caps in Mexico has decreased due to shifts in packaging options in both the beer and soft drink industries. In response to this trend, in 1998 FEMSA Empaques added a plastic cap production unit to its existing facilities. The current installed capacity of this unit is 1.1 billion caps per year. FEMSA Empaques has been able to minimize the impact of reduced demand by its beverage affiliates through sales to an increasing number of domestic third party clients and through exports. In 2003, export demand accounted for 58.5% of FEMSA Empaques’ crown cap production.
The following table sets forth an allocation of FEMSA Empaques’ sales volume of crown caps and closures by client category:
FEMSA Empaques—Crown Caps and Closures
| Year Ended December 31, | |||||
| 2003 | 2002 | 2001 | 2000 | 1999 | |
| Crown caps and closures sales volume (in | |||||
| Millions of units) | 14,347 | 14,287 | 14,028 | 13,404 | 12,765 |
| Client Categories: | |||||
| FEMSA Cerveza | 27.2% | 27.4% | 27.9% | 29.0% | 30.9% |
| Coca-Cola FEMSA | 4.3 | 5.6 | 5.4 | 5.9 | 6.0 |
| Third parties | 68.5 | 67.0 | 66.7 | 65.1 | 63.1 |
| Domestic | 10.0 | 11.9 | 15.7 | 18.9 | 20.8 |
| Export | 58.5 | 55.1 | 51.0 | 46.2 | 42.3 |
| Total Sales Volume | 100.0% | 100.0% | 100.0% | 100.0% | 100.0% |
Glass Bottles
FEMSA Empaques manufactures glass bottles through Sivesa, which was founded in 1948. Sivesa conducts operations through its glass production facility in Orizaba, Veracruz and its bottle decorating plant in Nogales, Veracruz. In 1979, the bottling department acquired “press blow” technology through Hermann Heye, Kommanditgesellschaft, which we refer to as Heye Glass of Germany, to produce narrow-neck beer bottles. The glass production facility in Orizaba includes three glass furnaces with an aggregate glass production capacity of 260,000 tons per year (the equivalent of approximately 1,300 million bottles). As of December 31, 2003, Sivesa’s capacity utilization was approximately 80.4%.
In the past, all of Sivesa’s output was sold to FEMSA Cerveza and Coca-Cola FEMSA. However, in the late 1990s Sivesa began selling bottles to domestic third party clients because of a reduction in the purchase of glass bottles by Coca-Cola FEMSA resulting from rapid changes in the presentation mix to non-returnable PET presentations in the Mexican market. The reduction in glass bottle sales volume during 1999 and 2000 reflects this change in presentation mix. In 2001 and 2002, this trend reverted as Coca-Cola FEMSA increased its demand for glass bottles with the introduction of a new eight-ounce Coca-Cola non-returnable presentation. In 2003, the sales volume to FEMSA Cerveza increased, but was not enough to compensate for the decrease in sales volume to domestic third parties and Coca-Cola FEMSA. During 2003, Sivesa sold 74.5% of its output to FEMSA Cerveza and 19.5% to Coca-Cola FEMSA. This represented 100% of FEMSA Cerveza’s bottle requirements and approximately 95% of Coca-Cola FEMSA’s bottle requirements. The following table sets forth an allocation of FEMSA Empaques’ sales volume of glass bottles by client category:
FEMSA Empaques—Glass Bottles
| Year Ended December 31, | |||||
| 2003 | 2002 | 2001 | 2000 | 1999 | |
| Glass bottles sales volume (in Millions of Bottles) | 1,034 | 1,053 | 972 | 790 | 856 |
| Client Categories: | |||||
| FEMSA Cerveza | 74.5% | 68.2% | 59.8% | 69.6% | 73.4% |
| Coca-Cola FEMSA | 19.5 | 21.0 | 8.6 | 3.5 | 2.2 |
| Third parties | 6.0 | 10.8 | 31.6 | 26.9 | 24.4 |
| Domestic | 3.9 | 9.8 | 26.6 | 21.2 | 21.5 |
| Export | 2.1 | 1.0 | 5.0 | 5.7 | 2.9 |
| Total Sales Volume | 100.0% | 100.0% | 100.0% | 100.0% | 100.0% |
Other
FEMSA Empaques manufactures commercial refrigerators through Vendo and labels and flexible packaging through Grafo Regia. Vendo, which began operations in Mexico City in 1941, produces vertical and horizontal commercial refrigerators for the soft drink, beer and food industries. In 2003, Vendo sold approximately 101,415 refrigeration units, 74.9% of which were sold to affiliates. In 2003, Grafo Regia, which began operations in 1954, has its facilities in Monterrey with an annual production capacity of 13,500 tons of flexible packaging. In 2003, Grafo Regia operated at approximately 88.5% of capacity. During 2003, Grafo Regia sold 60.0% of its label production to FEMSA Cerveza and 25.8% to Coca-Cola FEMSA. Third-party customers accounted for the remaining 14.2% of production in 2003.
Management believes that growth at Vendo and Grafo Regia will continue to reflect the marketing strategies of Coca-Cola FEMSA and FEMSA Cerveza.
Plant Locations
The following map shows the locations of FEMSA Empaques’ principal production facilities:
Raw Materials
The principal raw materials used by FEMSA Empaques include aluminum, steel, paper, aluminum foil, silica sand, soda ash and polyethylene. FEMSA Empaques is vertically integrated in silica sand mining, and FEMSA Empaques’ silica sand mine has been able to satisfy all of FEMSA Empaques’ silica sand requirements. With the exception of aluminum, all of these products are available from a variety of domestic and international sources. FEMSA Empaques purchases aluminum and steel directly from qualified suppliers on a contractual basis. These contracts generally have terms of six months or one year and specify prices free-on-board at FEMSA Empaques’ plants. Companies such as Alcoa, Nittetsu-Shoji, Alcan, CSN and Rasselstein have been selected as qualified suppliers. FEMSA Empaques purchases polyethylene from Petróleos Mexicanos, which we refer to as PEMEX, and several other suppliers.
Seasonality
Demand for FEMSA Empaques’ products is closely correlated to demand in the beverage industry. However, as a supplier to the beverage industry, FEMSA Empaques’ peak demand periods generally precede the peak beverage seasons.
Other Business Segment
FEMSA Logística, S.A. de C.V., which we refer to as Logistica, provides logistics services to Coca-Cola FEMSA, FEMSA Empaques and third-party clients that either supply or participate directly in the Mexican beverage industry or in other industries. Logistica provides integrated logistics support for its clients’ supply chain, including the management of carriers and other supply chain services. Prior to January 1, 2003, we reported Logistica as part of a separate business segment that included Logistica CCM, S.A. de C.V., which we referred to as Logistica CCM and which provided logistics services to FEMSA Cerveza. As of January 1, 2003, Logistica CCM was merged into FEMSA Cerveza, and we began reporting Logistica as part of our other business segment.
Perfil Corporativo, S.A. de C.V., which we refer to as Perfil Corporativo, is the owner of the Mundet brands of soft drinks and certain concentrate production equipment.
FEMSA Servicios employs all of our corporate staff, including the personnel managing the areas of finance, corporate accounting, taxation, legal, planning, human resources and internal audit. FEMSA Servicios directs, controls, supervises and reviews the operations of our subholding companies. FEMSA Cerveza, FEMSA Empaques and FEMSA Comercio pay Emprex management fees for the services provided to them by FEMSA Servicios. In addition, FEMSA Cerveza and Coca-Cola FEMSA have each entered into a services agreement with FEMSA Servicios pursuant to which they pay for specific services.
Description of Property, Plant and Equipment
As of December 31, 2003, 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 beer, soft drink and packaging operations and office space. In addition, FEMSA Comercio owns approximately 10% 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 forth the location, principal use and production area of our production facilities, and the subholding company that owns such facilities:
Production
Facilities of FEMSA
On December 31, 2003
| Subholding Company | Location | Principal Use | Production Area (thousand sq. meters) |
| FEMSA Cerveza | |||
| Tecate, Baja California Norte | Brewery | 90 | |
| Toluca, Estado de Mexico | Brewery | 374 | |
| Guadalajara, Jalisco | Brewery | 97 | |
| Monterrey, Nuevo León | Brewery | 209 | |
| Navojoa, Sonora | Brewery | 463 | |
| Orizaba, Veracruz | Brewery | 246 | |
| Coca-Cola FEMSA | |||
| México | San Cristobal de las Casas, Chiapas | Soft Drink Bottling Plant | 24 |
| Cedro, Distrito Federal | Soft Drink Bottling Plant | 18 | |
| Cuautitlán, Estado de Mexico | Soft Drink Bottling Plant | 35 | |
| Los Reyes la Paz, Estado de Mexico | Soft Drink Bottling Plant | 28 | |
| Toluca, Estado de Mexico | Soft Drink Bottling Plant | 280 | |
| Celaya, Guanajuato | Soft Drink Bottling Plant | 87 | |
| León, Guanajuato | Soft Drink Bottling Plant | 38 | |
| Morelia, Michoacan | Soft Drink Bottling Plant | 50 | |
| Juchitán, Oaxaca | Soft Drink Bottling Plant | 27 | |
| Ixtacomitán, Tabasco | Soft Drink Bottling Plant | 90 | |
| Apizaco, Tlaxcala | Soft Drink Bottling Plant | 80 | |
| Coatepec, Veracruz | Soft Drink Bottling Plant | 96 | |
| Guatemala | Guatemala City | Soft Drink Bottling Plant | 46 |
| Nicaragua | Managua | Soft Drink Bottling Plant | 59 |
| Costa Rica | San José | Soft Drink Bottling Plant | 52 |
| Panama | Panama City | Soft Drink Bottling Plant | 29 |
| Colombia | Barranquilla | Soft Drink Bottling Plant | 27 |
| Bogotá Norte | Soft Drink Bottling Plant | 89 | |
| Bucaramanga | Soft Drink Bottling Plant | 27 | |
| Cali | Soft Drink Bottling Plant | 88 | |
| Manantial | Soft Drink Bottling Plant | 33 | |
| Medellín | Soft Drink Bottling Plant | 44 | |
| Venezuela | Antimano | Soft Drink Bottling Plant | 14 |
| Barcelona | Soft Drink Bottling Plant | 141 | |
| Calabozo | Soft Drink Bottling Plant | 70 | |
| Maracaibo | Soft Drink Bottling Plant | 34 | |
| Maracay | Soft Drink Bottling Plant | 31 | |
| Valencia | Soft Drink Bottling Plant | 91 | |
| Brazil | Campo Grande | Soft Drink Bottling Plant | 36 |
| Jundiaí | Soft Drink Bottling Plant | 191 | |
| Mogi das Cruzes | Soft Drink Bottling Plant | 95 | |
| Argentina | Alcorta | Soft Drink Bottling Plant | 73 |
| FEMSA Empaques | |||
| Ensenada, Baja California Norte | Beverage Cans | 33 | |
| Toluca, Estado de Mexico | Beverage Cans | 22 | |
| Monterrey, Nuevo León | Crown Caps and Can Lids | 51 | |
| San Juan del Río, Querétaro | Refrigeration Equipment | 25 | |
| Acayucan, Veracruz | Silica Sand Mine | 7 | |
| Nogales, Veracruz | Bottle Decoration | 26 | |
| Orizaba, Veracruz | Glass Bottles | 23 |
Insurance
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 with goods in transit. In addition, we maintain an “all risk” liability insurance policy that covers product liability. We purchase our insurance coverage through an insurance broker. The policies are issued by Allianz, and the coverage is partially reinsured in the international reinsurance market.
Capital Expenditures and Divestitures
Our consolidated capital expenditures for the years ended December 31, 2003, 2002 and 2001 were Ps. 6.789 billion, Ps. 5.780 billion and Ps. 5.531 billion, respectively, and were for the most part financed from cash from operations generated by our subsidiaries. These amounts were invested in the following manner:
Capital Expenditures
| Year Ended December 31, | |||
| 2003 | 2002 | 2001 | |
| In Millions of Mexican pesos | |||
| Coca-Cola FEMSA | Ps. 1,910 | Ps. 1,410 | Ps. 1,000 |
| FEMSA Cerveza | 3,246 | 3,292 | 3,674 |
| FEMSA Comercio | 1,210 | 857 | 638 |
| FEMSA Empaques | 376 | 255 | 95 |
| Others | 47 | (34) | 124 |
| Total | Ps. 6,789 | Ps. 5,780 | Ps. 5,531 |
Coca-Cola FEMSA
During 2003, Coca-Cola FEMSA's capital expenditures focused on integration of its new territories, placing refrigeration equipment with retailers and investments in returnable bottles and cases, increasing plant operating efficiencies, improving the efficiency of its distribution infrastructure and advancing information technology. Capital expenditures in Mexico were approximately Ps. 1,431 million and accounted for most of its capital expenditures.
FEMSA Cerveza
Production
During 2003, FEMSA Cerveza invested approximately Ps. 783 million in its production facilities, of which Ps. 627 million was spent on equipment substitution and upgrades and approximately Ps. 145 million on expansion projects in existing production facilities. The capacity expansion projects occurred mainly in the Navojoa brewery. FEMSA Cerveza’s monthly installed capacity as of December 31, 2003 was 2.7 million hectoliters, equivalent to an annualized installed capacity of 32.5 million hectoliters.
Distribution
In 2003, FEMSA Cerveza invested Ps. 258 million in its distribution network. Approximately Ps. 163 million of this amount was invested in the replacement of the distribution fleet, Ps. 20 million in land and buildings and improvements to leased properties dedicated to various distribution functions, Ps. 32 million in office equipment for the distribution units and the remaining Ps. 43 million in other distribution-related investments.
Market-related Investments
During 2003, FEMSA Cerveza invested approximately Ps. 2.2 billion in market-related activities and brand support in the domestic market. A significant amount of these investments were directed to tied-account agreements with retailers and commercial support to owned and third-party distributors. Investments in retail agreements with tied customers that exceed a one-year term are capitalized and amortized over the life of the agreement. In general, FEMSA Cerveza’s retail agreements are for a period of three to four years. Other market-related investments include the purchase of refrigeration equipment, coolers, plastic furniture and other promotional items. These items are placed with retailers as a means of facilitating the retailers’ ability to service consumers and to promote the image and profile of FEMSA Cerveza’s brands.
FEMSA Comercio
FEMSA Comercio’s principal investment activity is the construction and opening of new stores. During 2003, FEMSA Comercio opened 582 net new Oxxo stores. The amount invested in 2003 dedicated to the opening of new stores and improvements to leased properties was Ps. 1.1 billion. In addition, FEMSA Comercio invested Ps. 76 million in ERP system software.
FEMSA Empaques
In 2003, FEMSA Empaques invested a total of Ps. 376 million, of which Ps. 225 million was for the refurbishment of a glass bottle furnace. In addition, investments in the metal products production facilities, which include aluminum cans and crown caps, amounted to Ps. 76 million, primarily for plant improvement and equipment substitution.
Regulatory Matters
Competition Legislation
The Ley Federal de Competencia Económica (the Federal Economic Competition Law or the Mexican Competition Law) became effective on June 22, 1993. The Mexican Competition Law and the Reglamento de la Ley Federal de Competencia Económica (the regulations under the Mexican Competition Law), effective as of March 9, 1998, regulate monopolies and monopolistic practices and require Mexican government approval of certain mergers and acquisitions. The Mexican Competition Law subjects the activities of certain Mexican companies, including us, to regulatory scrutiny. In addition, the regulations of Mexican Competition Law prohibit members of any trade association from reaching any agreement relating to the price of their products. Management believes that we are currently in compliance in all material respects with Mexican competition legislation.
In Mexico and in some of the other countries in which we operate, we are involved in ongoing competition related procedures. We believe that the outcome of these procedures will not have a material adverse effect on our financial condition. See “Item 8. Financial Information––Legal Proceedings––FEMSA Cerveza––Antitrust Matters” and “Item 8. Financial Information––Legal Proceedings––Coca-Cola FEMSA––Antitrust Matters.”
Environmental Matters
In all of the countries where we operate, our businesses are subject to federal and state laws and regulations relating to the protection of the environment. We have 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 our results of operations or financial condition. However, since environmental laws and regulations and their enforcement are becoming increasingly more stringent in our territories, and there is increased awareness of local authorities for higher environmental standards in the countries where we operate, changes in current regulations may result in an increase in costs, which may have an adverse effect on our future results of operations or financial condition. Management is not aware of any pending regulatory changes that would require additional remedial capital expenditures in a significant amount.
Mexico. Our Mexican operations are subject to Mexican federal and state laws and regulations relating to the protection of the environment. The principal legislation is the Ley General de Equilibrio Ecológico y la Protección al Ambiente (the Federal General Law of Ecological Equilibrium and Environmental Protection) or the Mexican Environmental Law, the Ley General para la Prevención y Gestión Integral de los Residuos (the General Law for the Prevention and Integral Management of Waste), which are enforced by the Secretaría de Medio Ambiente, Recursos Naturales y Pesca (the Ministry of the Environment, Natural Resources and Fisheries) or SEMARNAP. SEMARNAP 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 Mexican companies file periodic reports with respect to air and water emissions and hazardous wastes and set forth standards for waste water discharge that apply to their 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 to install catalytic converters and liquid petroleum gas in delivery trucks for our operations in Mexico City.
In addition, we are subject to the Ley Federal de Derechos (the Federal Law of Governmental Fees), also enforced by SEMARNAP. Adopted in January 1993, the law provides that plants located in Mexico City that use deep water wells to supply their water requirements must pay a fee to the city for the discharge of residual waste water to drainage. In 1995, municipal authorities began to test the quality of the waste water discharge and charge plants an additional fee for measurements that exceed certain standards published by SEMARNAP.
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 dangerous and toxic materials. In some countries in Central America, Coca-Cola FEMSA is in the process of bringing its operations into compliance with new environmental laws. For example, in Nicaragua Coca-Cola FEMSA is in the final phase of the construction of a water treatment plant located at its bottler plant in Managua. Also, Coca-Cola FEMSA’s Costa Rica operations have participated in a joint effort along with the local division of The Coca-Cola Company called Proyecto Planeta (Project 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 municipal laws and regulations related to the protection of the environment and the disposal of toxic and dangerous materials. These laws include the control of atmospheric emissions and strict limitations on the use of chlorofluorocarbons. Coca-Cola FEMSA is also engaged in nationwide campaigns for the collection and recycling of glass and plastic bottles.
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 the Ley Orgánica del Ambiente (the Organic Environmental Law), the Ley Sobre Sustancias, Materiales y Desechos Peligrosos (the Substance, Material and Dangerous Waste Law) and the Ley Penal del Ambiente (the Criminal Environment Law). Since the enactment of the Organic Environmental Law in 1995, Coca-Cola FEMSA’s Venezuelan subsidiary has presented to the proper authorities plans to bring certain of its production facilities and distribution centers into compliance with the law. While the laws provide certain grace periods for compliance with the new environmental standards, Coca-Cola FEMSA has had to adjust some of the originally proposed timelines presented to the authorities, because of delays in the completion of some of these projects.
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 dangerous gases, 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 from the Brazilian authorities for its compliance with environmental regulations and for having standards well above those imposed by the law. The plant has been certified for the ISO 9000 since March 1995 and for the ISO 14001 since March 1997.
Argentina. Coca-Cola FEMSA’s Argentine operations are subject to federal and provincial 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 the Secretaría de Recursos Naturales y Ambiente Humano (the Ministry of Natural Resources and Human Environment) and the Secretaría de Política Ambiental (the Ministry of Environmental Policy) for the province of Buenos Aires. Coca-Cola FEMSA’s Alcorta plant meets and is in compliance with waste water discharge standards.
Water Supply Law
FEMSA Cerveza and Coca-Cola FEMSA purchase water directly from municipal water companies and pump water from wells pursuant to concessions obtained from the Mexican government through the National Water Commission on a plant-by-plant basis. Water use in Mexico is regulated primarily by the Ley de Aguas Nacionales de 1992 (including regulations issued thereunder, the Mexican 1992 Water Law), which created the National Water Commission, charged with overseeing the national system of water use. Under the Water Law of 1992, concessions for the use of a specific volume of ground or surface water generally run for five, ten or fifteen year terms depending on the supply of groundwater in each region as projected by the National Water Commision. Concessionaires may request concession terms to be extended upon termination. 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 three consecutive years. Our management believes that we are in general compliance with the terms of our existing concessions and that such concessions satisfy our current water requirements in Mexico. We cannot assure you, however, that groundwater will be available in sufficient quantities to meet future production needs.
We do not currently require a permit to obtain water in our other territories. In Nicaragua, Costa Rica and some plants in Colombia, we own private water wells. In Argentina, we obtain water from Aguas Argentinas, a privately-owned concessionaire of the Argentine government. In the remainder of our territories, we obtain water from governmental agencies or municipalities. In the past five years we have not had a water shortage in any of our territories, although we can give no assurances that water will be available in sufficient quantities to meet our future production needs or that additional regulations relating to water use will not be adopted in the future.
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
General
The following discussion should be read in conjunction with, and is entirely qualified by reference to, our consolidated financial statements and the notes to those statements. Our consolidated financial statements were prepared in accordance with Mexican GAAP, which differs in certain significant respects from U.S. GAAP. Notes 25 and 26 to our consolidated financial statements provide a description of the principal differences between Mexican GAAP and U.S. GAAP as they relate to us, and a reconciliation to U.S. GAAP of net majority income, majority shareholders' equity and certain other selected financial data.
Our consolidated financial statements include the financial statements of FEMSA and those of all companies in which we own directly or indirectly a majority of the outstanding voting capital stock and/or exercise control.
Acquisition of Panamco
On May 6, 2003, our subsidiary, Coca-Cola FEMSA, completed the acquisition of Panamco. The acquisition of Panamco resulted in a substantial increase in the size and geographic scope of our subsidiary's operations. The purchase price for 100% of the capital stock of Panamco was Ps. 29,518 million, excluding transaction expenses. Coca-Cola FEMSA also assumed Ps. 9,085 million of net debt. The acquisition was financed with an equity contribution from us of Ps. 2,779 million, an exchange of The Coca-Cola Company's equity interests in Panamco valued at Ps. 7,041 million for new shares of Coca-Cola FEMSA, cash on hand of Ps. 2,820 million and new indebtedness of Coca-Cola FEMSA in Mexican pesos and U.S. dollars in the amount of Ps. 17,267 million. As a result of the Panamco acquisition, in accordance with Mexican GAAP, Coca-Cola FEMSA recognized as intangible assets with indefinite lives, the rights to produce and distribute trademark brands of The Coca-Cola Company. These identified intangibles, calculated as the difference between the price paid and the fair value of the net assets acquired, were valued at Ps. 33,420 million, including financial and advisory fees, costs associated with closing certain acquired facilities, rationalizing and consolidating operations, relocating the corporate and other offices and the integration of the operations.
Comparability of Information Presented
Under Mexican GAAP, Panamco is included in our consolidated financial statements since May 2003 and is not reflected for periods prior to this date. As a result, our consolidated financial statements as of and for the year ended December 31, 2003 are not comparable to prior periods. Financial information provided by us with respect to the newly acquired territories is also not comparable to Panamco's consolidated financials statements for prior periods as they were prepared using different policies and in accordance with U.S. GAAP and in U.S. dollars, while we present our financial statements in Mexican GAAP and Mexican pesos as part of our consolidation. The acquisition of Panamco only impacted the comparability of our consolidated information and of the Coca-Cola FEMSA segment. The comparability of our remaining segments was not affected by the acquisition.
Effects of Changes in Economic Conditions
Our results of operations are affected by changes in economic conditions in Mexico and in the other countries in which we operate. For the years ended December 31, 2003, 2002 and 2001, 84.6 %, 96.7% and 96.2%, respectively, of our total sales were attributable to Mexico . As a result, after the acquisition of Panamco, we have greater exposure to countries in which we have not historically conducted operations, particularly countries in Central America and Colombia , Venezuela and Brazil , although we continue to generate a substantial portion of our sales from Mexico .
Our future results may be significantly affected by the general economic and financial conditions in the countries where we operate, including by levels of economic growth, by the devaluation of the local currency, by inflation and high interest rates or by political developments, and may result in lower demand for our products, lower real pricing or a shift to lower margin products. Because a large percentage of our costs are fixed costs, we may not be able to reduce costs and expenses, and our profit margins may suffer as a result of downturns in the economy of each country. In addition, an increase in interest rates in Mexico would increase our cost of peso- denominated variable interest rate, funding and would have an adverse effect on our financial position and results of operations. A depreciation of the Mexican peso relative to the U.S. dollar would increase our cost of those raw materials, the price of which is paid in or determined with reference to the U.S. dollar and debt obligations denominated in U.S. dollars, and thereby may negatively impact our financial condition and results of operations.
Operating Leverage
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, FEMSA Cerveza and FEMSA Empaques 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 and FEMSA Cerveza are carried out through extensive distribution networks, the principal fixed assets of which are warehouses and trucks. The distribution systems of both Coca-Cola FEMSA and FEMSA Cerveza are designed to handle large volumes of beverages. Fixed costs represent an important proportion of the total distribution expense of both Coca-Cola FEMSA and FEMSA Cerveza. 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. Nonetheless, periods of decreased utilization because of lower volumes will negatively impact our operating margins.
Critical Accounting Estimates
The preparation of our consolidated financial statements requires that we make estimates and assumptions that affect (i) the reported amounts of our assets and liabilities, (ii) the disclosure of our contingent assets and liabilities at the date of the financial statements and (iii) the reported amounts of revenues and expenses during the reporting period. We base our estimates and judgments 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 actual results may differ from these estimates under different assumptions or conditions. We evaluate our estimates and judgments on an on-going basis. Our significant accounting policies are described in notes 4 and 5 to our consolidated financial statements. We believe our most critical accounting policies that imply the application of estimates and/or judgments are:
Allowance for doubtful accounts
We determine our allowance for doubtful accounts based on an evaluation of the aging of our receivable portfolio. The amount of the allowance contemplates our historical loss rate on receivables and the economic environment in which we operate. Our beer operations represent the most important part of the consolidated allowance for doubtful accounts as a result of the credit that FEMSA Cerveza extends to retailers, on terms and conditions in accordance with industry practices. Soft drink and retail sales are generally realized in cash.
Bottles and cases; allowance for bottle breakage
We classify bottles and cases in accordance with industry practices. Consequently, for FEMSA Cerveza, bottles and cases are classified as inventories, and for Coca-Cola FEMSA, they are classified as fixed assets. For both of these subsidiaries, breakage is expensed as incurred, and returnable bottles and cases are not depreciated. Coca-Cola FEMSA determines depreciation of bottles and cases only for tax purposes.
We periodically compare the book breakage expense with calculated depreciation expense, estimating a useful life of four years for returnable glass bottles, one year for returnable plastic bottles and four years for returnable cases. These useful lives are determined in accordance with our business experience. The annual calculated depreciation expense has been similar to the annual book breakage expense. Whenever we decide to discontinue a particular returnable presentation and retire it from the market, we write-off the discontinued presentation through an increase in the breakage expense.
Property, plant and equipment
Property, plant and equipment are depreciated over their useful lives. The estimated useful lives represent the period we expect the assets to remain in service and to generate revenues. We base our estimates on independent appraisals and the experience of our technical personnel.
We describe the methodology used to restate imported equipment in note 5(g) to our consolidated financial statements, which includes applying the exchange and inflation rates of the country of origin utilized as permitted by Mexican GAAP. We believe this method more accurately presents the fair value of the assets than restated cost determined by applying inflation factors.
Coca-Cola FEMSA valued at fair value all fixed assets acquired in the Panamco transaction, considering their operating conditions and the future cash flows they will generate in accordance with their estimated future use by Coca-Cola FEMSA management.
In 2003, we decided to expand from three to five years the useful life for the refrigerators of the Mexican operations of Coca-Cola FEMSA, based on technical studies, strong control over the refrigerators placed in point of sales and the replacement investment refrigerator program for the following years. As a result, depreciation expense recorded in 2003 decreased approximately Ps. 92 millions. The useful life of refrigerators for the new territories acquired from Panamco is in accordance with the new accounting estimate of five years.
Valuation of intangible assets and goodwill
As we discuss in note 5(i) to the consolidated financial statements, beginning in 2003 FEMSA applies Bulletin C-8 “ Activos Intangibles ” (Intangible Assets) (Bulletin C-8), which establishes that project development costs should be capitalized if they fulfill the criteria established for recognition as assets. Additionally, Bulletin C-8 requires identifying all intangible assets to reduce as much as possible the goodwill associated with business combinations. Prior to 2003, the excess of the purchase price over the fair value of the net assets acquired in a business combination was considered to be goodwill. With the adoption of Bulletin C-8, Coca-Cola FEMSA considers such excess to relate to the rights to produce and distribute trademark Coca-Cola products. 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 to receive the benefits.
As required in Bulletin C-8, we determined the fair value of all Panamco's assets and liabilities as of the date of acquisition, and we assigned the excess purchase price over the fair value of the net assets. This resulted in the recognition of an intangible asset with indefinite life denominated Rights to Produce and Distribute Coca-Cola Trademark Products of Ps. 33,420 million , which will be subject to annual impairment tests, for U.S. GAAP and Mexican GAAP. The fair value of the assets and liabilities was determined considering the following:
-
The fair value of the assets acquired: the value of fixed assets, glass returnable bottles and refrigerators were adjusted considering their remaining useful lives, general operational conditions of the assets at the acquisition date, certain operational and strategic decisions that Coca-Cola FEMSA implemented as it assumed control of the operations as well as the standardization with Coca-Cola FEMSA's accounting policies and estimates.
-
Labor and other liabilities: severance of personnel and other obligations generated by Panamco's operations before Coca-Cola FEMSA assumed control of the operations.
-
Cancellation of goodwill: the goodwill previously recorded by Panamco was cancelled.
For Mexican GAAP purposes, goodwill is the difference between the price paid and the fair value of the shares and/or net assets acquired that was not assigned directly to an intangible asset. Goodwill is recorded in the functional currency of the subsidiary in which the investment was made and is restated by applying the inflation rate of the country of origin and the year-end exchange rate. Goodwill is amortized over a period of not more than 20 years.
Under U.S. GAAP, SFAS No. 142 “Goodwill and Other Intangible Assets” went into effect in 2002. Under this standard, goodwill is no longer subject to amortization, but instead is subject to an initial impairment review in 2002 and subsequent impairment test to be performed annually by us, unless an event occurs or circumstances change by which it becomes more likely than not that a reporting unit reduces its fair value below its carrying amount, in which case an interim impairment test must be performed. Our impairment review indicates that no impairment charge is required as of the beginning of 2004.
Impairment of intangible assets, goodwill and long-lived assets
We continually review the carrying value of our intangible assets, goodwill and long-lived assets for accuracy. We review for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable based on our projections of anticipated future cash flows. While we believe that our estimates of future cash flows are reasonable, different assumptions regarding such cash flows could materially affect our evaluations.
In December 2001, the Argentine government adopted a series of economic measures, the most important of which consisted of restrictions on cash withdrawals and foreign exchange transactions. Due to the continuing difficult economic situation in Argentina , the uncertainty with respect to the period of recovery and the instability of the exchange rate, on July 1, 2002, we performed a valuation of our investment in Coca-Cola FEMSA Buenos Aires, based on market price value multiples of comparable businesses. The valuation resulted in the recognition of an impairment of Ps. 457 million, which was recorded in our results of 2002. Given the present economic situation in Argentina , we believe that the current net asset value of our foreign subsidiary is fairly valued, and although we can give no assurances, we do not expect to recognize additional impairments in the future in Argentina .
During 2003, FEMSA Cerveza recognized an impairment of certain fixed assets that will be replaced in the near future in accordance with its investment master plan. The replacement cost of the new machinery and equipment as well as the new location compared to carrying value of these assets result in a loss, which was recorded in other expenses in the 2003 income statement of Ps. 680 million.
Our evaluations throughout the year and up to the date of this filing did not lead to any other significant impairment of goodwill or long-lived assets. We can give no assurance that our expectations will not change as a result of new information or developments. Changes in economic or political conditions in all the countries in which we operate or in the industries in which we participate, however, may cause us to change our current assessment.
Executory contracts
As part of the normal course of business, we frequently invest in the development of our beer distribution channels through a variety of commercial agreements with different retailers in order to generate sales volume. These agreements are considered to be executory contracts and accordingly the costs incurred under these contracts are recognized as performance under the contracts is received.
These agreements require cash disbursements to be made in advance to certain retailers in order to fund activities intended to generate volume. These advance cash disbursements are then compensated for as sales are invoiced. These disbursements are considered to be market-related investments, which are capitalized as other assets. The amortization of amounts capitalized is presented as a reduction of net sales in relation to the volume sold to each retailer. The period of amortization is between three and four years, which is the normal term of the commercial agreements.
We periodically evaluate the carrying value of executory contracts. If the carrying value is considered to be impaired, these assets are written down as appropriate. The accuracy of the carrying value is based on our ability to predict certain key variables such as sales volume, prices and other industry and economic factors. Predicting these key variables involves assumptions based on future events. These assumptions are consistent with our internal projections.
Labor liabilities
Our labor liabilities are comprised of pension plan, seniority premium and post-retirement medical services. The determination of our obligations and expenses for pension and other post-retirement benefits is dependent on our selection of certain assumptions used by actuaries in calculating such amounts. We evaluate our assumptions at least annually. Those assumptions are described in note 15 to our consolidated financial statements and include the discount rate, expected long-term rate of return on plan assets, rates of increase in compensation costs and certain employee-related factors, such as turnover, retirement age and mortality. All of our assumptions depend on the economic circumstances of each country in which we operate.
In accordance with Mexican GAAP, actual results that differ from our assumptions are accumulated and amortized over future periods and, therefore, generally affect our recognized expenses and recorded obligations in these future periods. While we believe that our assumptions are appropriate, significant differences in our actual experience or significant changes in our assumptions may materially affect our pension 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 2004 annual pension expense for Mexico , along with the impact on pension expense of a 1% change in each assumed rate.
| Assumption | 2004 Rate (in real terms) |
Impact of Change in Millions of Ps.(1)
|
|
| +1% | -1% | ||
| Mexican Subsidiaries: | |||
Discount rate |
6.0% | Ps. (184) | Ps. 350 |
Salary growth rate |
2.0% | 186 | (123) |
Long-term asset return |
6.0% | (184) | 350 |
| Foreign Subsidiaries: | |||
Discount rate |
4.5% | (31) | 36 |
Salary growth rate |
1.5% | 36 | (29) |
Long-term asset return |
4.5% | (31) | 36 |
| (1) | The impact is not the same for an increase of 1% as for a decrease of 1% because the rates are not linear. |
New Accounting Pronouncements
In Mexican GAAP
Bulletin C-15, “Deterioro en el Valor de los Activos de Larga Duración y su Disposición” (Impairment of the Value of Long-Lived Assets and Their Disposal) (Bulletin C-15): In March 2003, the Instituto Mexicano de Contadores Públicos or IMCP issued Bulletin C-15, the application of which is mandatory for financial statements for periods beginning on or after January 1, 2004, although early application is encouraged. Bulletin C-15 establishes, among others, new principles for the calculation and recognition of impairment losses for long-lived assets and their reversal. The calculation of such loss requires the determination of the recoverable value, which is now defined as the greater of the net selling price of a cash-generating unit and its value in use, which is the present value of discounted future net cash flows. The accounting principles issued prior to this new bulletin used future net cash f out requiring the discounting of such cash flows. We do not anticipate that this new standard will have a significant impact on our financial position or results of operations.
Bulletin C-12, “Instrumentos Financieros con Características de Pasivo, de Capital o de Ambos” (Financial Instruments with Characteristics of Debt, Equity or Both) (Bulletin C-12): In April 2003, the IMCP issued Bulletin C-12, the application of which is mandatory for financial statements for periods beginning on or after January 1, 2004, although early application is encouraged. Bulletin C-12 establishes the more significant differences between debt and equity, as the basis for the development of the criteria necessary to appropriately identify, classify and record, upon initial recognition, the debt and equity components of compound financial instruments. This new pronouncement is similar to SFAS No. 150 “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity” of U.S. GAAP. We do not anticipate that this new standard will have a significant impact on our fina sults of operations.
In U.S. GAAP
SFAS No. 149, “Amendments of Statement 133 on Derivative Instruments and Hedging Activities” (SFAS No. 149): In April 2003, the FASB issued SFAS No. 149, which amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS No. 133. The changes in this statement improve financial reporting by requiring that contracts with comparable characteristics be accounted for similarly. The new standard will be effective for contracts entered into or modified after June 30, 2003, except as stated below and for hedging relationships designated after June 30, 2003. In addition, except as stated below, all provisions of this statement should be applied prospectively.
The provisions of this statement that relate to SFAS No. 133 implementation issues that have been effective for fiscal quarters that began prior to June 15, 2003, should continue to be applied in accordance with their respective effective dates. We do not anticipate that this new standard will have a significant impact on our financial position or results of operations.
FASB Interpretation No. 46, “Consolidation of Variable Interest Entities” (FIN 46): In January 2003, the FASB issued FIN 46. FIN 46 clarified the application of Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 was effective immediately for all variable interests held in a variable interest entity created after January 31, 2003. For a variable interest held by us in a variable interest entity created before February 1, 2003, we would be required to apply the provisions of FIN 46 as of December 31, 2004. We do not currently have any variable interests in a variable interest entity.
Operating Results
The following table sets forth our consolidated income statement for the years ended December 31, 2003, 2002 and 2001:
| Year Ended December 31, |
|||
| 2003
|
2002
|
2001
|
|
| (millions of constant Mexican pesos as of December 31, 2003) |
|||
| Net sales | Ps. 75,597 | Ps. 55,176 | Ps. 52,301 |
| Other operating revenues | 294
|
219
|
164
|
|
75,891 | 55,395 | 52,465 |
| Cost of sales | 39,371
|
27,640
|
26,070
|
|
36,520
|
27,755
|
26,395
|
| Operating expenses: | |||
|
5,740 | 4,870 | 4,814 |
|
18,696
|
13,094
|
12,713
|
|
24,436
|
17,964
|
17,527
|
| Income from operations | 12,084 | 9,791 | 8,868 |
| Participation in affiliated companies | 30
|
87
|
34
|
| 12,114
|
9,878
|
8,902
|
|
|
(2,540) | (943) | (985) |
|
695
|
465
|
497
|
| (1,845) | (478) | (488) | |
|
(2,532) | (293) | 256 |
|
954
|
398
|
(42)
|
| (3,423) | (373) | (274) | |
| Other expenses, net | (656)
|
(950)
|
(314)
|
| Income for the year before income tax, tax on assets and employee profit sharing | 8,035 | 8,555 | 8,314 |
| Income tax, tax on assets and employee profit sharing | 3,378
|
3,764
|
3,069
|
| Net income before change in accounting principle | 4,657 | 4,791 | 5,245 |
| Change in accounting principle | -
|
-
|
(30)
|
| Consolidated net income for the year | Ps. 4,657
|
Ps. 4,791
|
Ps. 5,215
|
| Net majority income | 3,093 | 2,947 | 3,547 |
| Net minority income | 1,564
|
1,844
|
1,668
|
| Ps. 4,657
|
Ps. 4, 791
|
Ps. 5,215
|
|
Operating Results by Segment
The following table sets forth certain operating results by segment financial information for each of our segments for the years ended December 31, 2003, 2002 and 2001. See note 24(a) to our consolidated financial statements for additional information by segment.
| Year Ended December 31,
|
|||
| 2003
|
2002
|
2001
|
|
| in millions of Mexican pesos | |||
| Net Sales | |||
|
35,487 | 18,519 | 17,636 |
|
21,763 | 21,453 | 21,367 |
|
16,601 | 13,247 | 11,157 |
|
7,328 | 6,843 | 6,830 |
| Total Revenues | |||
|
35,729 | 18,668 | 17,773 |
|
21,924 | 21,642 | 21,529 |
|
16,601 | 13,247 | 11,160 |
|
7,352 | 6,862 | 6,840 |
| Cost of Sales | |||
|
17,980 | 8,681 | 8,256 |
|
9,425 | 9,281 | 9,285 |
|
12,199 | 9,739 | 8,293 |
|
5,639 | 5,193 | 5,259 |
| Gross Profit | |||
|
17,749 | 9,987 | 9,517 |
|
12,499 | 12,361 | 12,244 |
|
4,402 | 3,508 | 2,867 |
|
1,713 | 1,669 | 1,581 |
| Income from Operations (1) | |||
|
6,710 | 4,627 | 4,057 |
|
3,586 | 3,687 | 3,458 |
|
694 | 506 | 309 |
|
988 | 941 | 890 |
| Depreciation | |||
|
1,480 | 959 | 987 |
|
1,175 | 1,158 | 1,030 |
|
131 | 94 | 84 |
|
301 | 272 | 256 |
| Percentages | |||
| Gross Margin (4) | |||
|
50.0% | 53.9% | 54.0% |
|
57.4% | 57.6% | 57.3% |
|
26.5% | 26.5% | 25.7% |
|
23.4% | 24.4% | 23.1% |
| Operating Margin (5) | |||
|
18.8% | 24.8% | 22.8% |
|
16.4% | 17.0% | 16.1% |
|
4.2% | 3.8% | 2.8% |
|
13.4% | 13.7% | 13.0% |
| __________________ | |
| (1) | Includes management fees paid to Emprex (and to Labatt in the case of FEMSA Cerveza). |
| (2) | Includes equity method of affiliated companies of Ps. 30, Ps. 87 and Ps. 34, respectively. |
| (3) | Includes breakage of bottles. |
| (4) | Gross margin calculated with reference to net sales. |
| (5) | Operating margin calculated with reference to total revenues and after deduction of management fees. |
Results of Operations for the Year Ended December 31, 2003
Compared to the Year Ended December 31, 2002
FEMSA Consolidated
Total Revenues
FEMSA's consolidated total revenues increased by 37.0% to Ps. 75.891 billion for the year ended December 31, 2003 from Ps. 55.395 billion for the year ended December 31, 2002. Consolidated net sales increased by 37.0% to Ps. 75.597 billion in 2003 from Ps. 55.176 billion in 2002 and represented 99.6% of total revenues in 2003 and in 2002.
The acquisition of Panamco and the inclusion by Coca-Cola FEMSA of the newly acquired territories for eight months of 2003 was the driving force behind our revenue increases. We also experienced revenue growth in each one of our other main subholding companies. FEMSA Cerveza increased its total sales volume by 3.2%, reaching 24.564 million hectoliters, resulting in an increase in FEMSA Cerveza's total revenues by 1.3% to Ps. 21.924 billion despite the adverse impact of a weak pricing environment. FEMSA Comercio had total revenue growth of 25.3% due to an increase of 582 net new Oxxo stores opening in 2003. FEMSA Empaques increased total revenues by 7.1% mostly as a direct result of an increase in demand for beverage cans as well as for refrigerators for the newly acquired Panamco territories.
Gross Profit
Consolidated gross profit increased by 31.6% to Ps. 36.520 billion in 2003 from Ps. 27.755 billion in 2002, primarily as a result of the inclusion by Coca-Cola FEMSA of the newly acquired territories for eight months of 2003. Gross margin decreased by 2.0% basis points to 48.3% for 2003 compared to 50.3% for 2002. The downward pressure on margins was primarily due to h igher raw material prices and the integration of the new Coca-Cola FEMSA operations. In addition, our dollar-linked variable cost of sales became more expensive on a real basis because of the depreciation of the Mexican peso in 2003.
Income from Operations
Our consolidated operating expenses (including management fees paid to Labatt) increased by 36.0% in 2003 to Ps. 24.436 billion from Ps. 17.964 billion in 2002. As a percentage of total revenues, consolidated operating expenses remained stable at 32.2% in 2003 versus 32.4% in 2002.
Consolidated administrative expenses increased by 17.9% to Ps. 5.740 billion in 2003 from Ps. 4.870 billion in 2002, primarily reflecting an increase of Ps. 818 million in the administrative expenses of Coca-Cola FEMSA as a consequence of the Panamco acquisition.
Consolidated sales expenses increased by 42.8% to Ps. 18.696 billion in 2003 from Ps. 13.094 billion in 2002, mainly reflecting the combination of a 54% increase of sales expenses of Coca-Cola FEMSA due to the Panamco acquisition, which explains most of the increase, and to a much lesser extent an increase of 26% in the sales expenses of FEMSA Comercio due to the aggressive expansion in the number of stores implemented during the year.
We incur various expenses related to the distribution of our products. We include these types of costs in the sales expenses line of our income statement. During 2003 and 2002, our distribution costs amounted to Ps. 4.848 billion and Ps. 4.092 billion, respectively, mainly due to the incorporation of Panamco. The exclusion of these charges from our cost of sales line may result in the amounts reported as gross profit not being comparable to other companies that may include all expenses related to their distribution network in cost of sales when computing gross profit (or an equivalent measure).
Consolidated income from operations (including results of affiliated companies) increased by 22.6% reaching Ps. 12.114 billion for the full year 2003 from Ps. 9.878 billion in 2002. The consolidated operating margin decreased 1.8% to 16.0% of total revenues in 2003 as compared to 2002. This margin contraction was primarily due to the integration of the newly acquired Panamco territories which have a lower level of profitability than Coca-Cola FEMSA's original territories, and the increased contribution of the Oxxo retail chain in our consolidated financial results which has lower gross profit margin. In addition to this, both FEMSA Cerveza and FEMSA Empaques recorded operating margin contractions reflecting a lower gross profit margin at both subsidiaries caused by lack of pricing increases and the impact of a weaker Mexican peso on the cost of U.S. dollar-denominated raw materials.
Some of our subsidiaries pay management fees to FEMSA in consideration for corporate services provided to such subsidiaries. Our subsidiaries' payments of management fees are eliminated in consolidation and, thus, have no effect on our consolidated operating expense, with the exception of the management fee paid by FEMSA Cerveza to Labatt, which amounted to Ps. 126 million in 2003 compared to Ps. 122 million in 2002. Prior to 2003, the excess of the purchase price over the fair value of the net assets acquired in a business combination was considered goodwill. With the adoption of Bulletin C-8, Coca-Cola FEMSA considers this excess to relate to the rights to produce and distribute Coca-Cola trademark products, which are recorded as intangible assets with indefinite lives that are not amortized, but are periodically subject to an impairment test. Therefore, we no longer amortize goodwill. (See note 5(i) to our consolida ted financial statements.)
Coca-Cola FEMSA
Total Revenues
Coca-Cola FEMSA's total revenues increased by 91.4% to Ps. 35.729 billion from Ps. 18.668 billion in 2002. Net sales increased by 91.6% to Ps. 35.487 billion in 2003, from Ps. 18.519 billion in 2002, as a result of the inclusion of sales from the newly acquired territories for eight months of 2003 as well as increases in sales in its previously existing territories in Mexico and Argentina.
Sales volumes increased to 1.4501 billion unit cases for 2003. Most of Coca-Cola FEMSA's sales volume, approximately 56.8%, was attributable to the Mexican operations, which grew sales volume to 850.1 million unit cases during 2003 from 504.7 million unit cases in 2002. The sales growth in Mexico was primarily attributable to the inclusion of the newly acquired territories. In addition to this the following factors also attributed to our sales growth in Mexico (i) solid performance from new flavored brands including Fresca pink grapefruit and Lift green apple , (ii) incremental sales volume in Ciel still water in a 5.0-liter presentation, particularly in central Mexico and (iii) volume growth from the Coca-Cola brand .
Average unit price per case decreased by 18.1% to Ps. 24.46 in 2003 from Ps. 29.86 in 2002 due to the inclusion of the newly acquired territories, which had a higher sales volume of lower priced products relative to the original Coca-Cola FEMSA territories.
Other operating revenues increased by 62.9% to Ps. 242.6 million in 2003, from Ps. 148.9 million in 2002. Other operating revenues mainly consist of sales to other bottlers pursuant to tolling arrangements in Argentina , revenues from sales of recyclable scrap to bottle suppliers and sales of point of sales materials for the fountain business.
Gross Profit
Coca-Cola FEMSA's cost of sales increased to Ps. 17.980 billion in 2003, from Ps. 8.681 billion in 2002, as a result of the inclusion of the newly acquired territories for eight months of 2003. As a percentage of total sales, cost of sales increased 3.8%, reflecting the higher costs of sales in the newly acquired territories mainly due to the different product mix and higher manufacturing costs. Coca-Cola FEMSA was also affected by the impact of the devaluation of the U.S. dollar against the Mexican peso as applied to raw materials with prices that are paid in or determined with reference to the U.S. dollar.
During 2003, Coca-Cola FEMSA's gross profit totaled Ps. 17.749 billion resulting in a gross margin of 49.68%. Mexico accounted for approximately 72.4% of Coca-Cola FEMSA's gross profit, totaling Ps. 12.845 billion in 2003. In Mexico, higher raw material prices, the effect of the devaluation of the Mexican peso versus the U.S. dollar on raw materials with prices payable in or determined with reference to the U.S. dollar, a softer economy and a lower disposable income amplified by a migration to multi-serving presentations from individual size presentations resulted in declining margins in 2003. Coca-Cola FEMSA's territories outside of Mexico have lower gross margins primarily due to the devaluation of the U.S. dollar versus their local currencies applied to their U.S. dollar-denominated expenses, in addition to higher manufacturing costs and different product mixes. In Central America , gross profit totaled Ps. 1.088 billion, approximately 6.1% of Coca-Cola FEMSA's gross profit, reaching a gross margin of 49.8% in 2003. In Argentina , Coca-Cola FEMSA was able to achieve a gross margin improvement of 2.6% as compared to 2002, resulting in a gross margin of 37.0% during 2003. This improvement was mainly driven by higher sales volume in more profitable products and an appreciation of the Argentine peso versus the U.S. dollar applied to its U.S. dollar-denominated raw materials and expenses.
Income from Operations
Coca-Cola FEMSA's operating expense was Ps. 11.039 billion in 2003, as a result of the inclusion of the newly acquired territories for eight months of 2003. As a percentage of total sales, operating expenses increased 2.4%, due to the standardization of marketing practices in the newly acquired territories and the fact that distribution costs in Coca-Cola FEMSA's new territories are higher than in its original territories. During 2003, in Mexico , Coca-Cola FEMSA eliminated Panamco's former headquarters in Mexico City and Miami , closed four plants out of 16, consolidated 29 distribution centers out of 142, introduced more than 73,000 new coolers into the market, and reconfigured pre-sale and distribution networks by reducing third party selling and distribution. Coca-Cola FEMSA implemented similar initiatives in its other territories as well. For example, it (i) closed 3 of 9 plants in Venezuela , (ii) closed 1 of 2 plants in Panama , (i ii) reduced its manufacturing plants from 17 to 11 in Colombia , and (iv) consolidated 1 of 4 plants in Brazil . The implementation of best practices and strong asset allocation efforts throughout its territories is an ongoing effort. However, during 2003, the potential cost savings from these efforts were more than offset by the incremental costs of the integration process.
Coca-Cola FEMSA incurs various expenses related to the distribution of its products. It includes these types of costs in the selling expenses line of its income statement. During 2003 and 2002, its distribution costs amounted to Ps. 2.804 billion and Ps. 2.099 billion, respectively. The exclusion of these charges from its cost of sales line may result in the amounts reported as gross profit not being comparable to other companies, which may include all expenses related to their distribution network in cost of sales when computing gross profit (or an equivalent measure) .
In Mexico , income from operations totaled Ps. 5.634 billion in 2003, and represented approximately 84.0% of that income from operations. Its other territories, accounting for 16.0% of that income from operations, had much lower operating margins. In these territories, Coca-Cola FEMSA sees opportunities to develop a more effective returnable packaging base, new product alternatives, and to improve execution practices. Total income from operations after amortization of goodwill grew to Ps. 6.710 billion in 2003, from Ps. 4.627 billion in 2002. Income from operations as a percentage of total revenues decreased 6.0% in 2003, from 24.8% to 18.8%, mainly as a result of the inclusion of its new territories, which have lower operating margins.
FEMSA Cerveza
Total Revenues
FEMSA Cerveza's net sales increased by 1.4% to Ps. 21.763 billion in 2003 from Ps. 21.453 billion in 2002. Other operating revenues, which consist mainly of sales of manufacturing by-products and sundries in retail locations owned by FEMSA Cerveza, totaled Ps. 161 million in 2003, 15.5% lower than in 2002. Total revenues for FEMSA Cerveza increased by 1.3% to Ps. 21.924 billion in 2003 from Ps. 21.642 billion in 2002. The increase in revenues in 2003 was primarily attributable to the net effect of the following: (i) a 3.3% and 1.4% increase in domestic and export volumes, respectively, and (ii) a reduction of 2.4% in domestic revenue per hectoliter and a 9% increase in export revenue per hectoliter. Domestic revenues represented 93% of the total, while the remaining 7% came from exports, which is for the most part in line with the previous year.
Domestic sales volume increased in 2003 by 3.3% reaching 22.582 million hectoliters compared to 21.856 million hectoliters in 2002. This increase was due to (i) the absence of a price increase since early 2002, (ii) a modest recovery in the Mexican economy, which experienced an estimated increase of 1.3% in Gross Domestic Product during the year and (iii) successful promotions, particularly with the Sol and Indio brands. Our domestic revenue per hectoliter increased 2.4% in nominal terms due to a successful shift in our sales mix from returnable presentations towards more premium, higher profit margin presentations such as non-returnable bottles and cans.
Export sales volume increased by 1.4% in 2003 reaching 1.982 million hectoliters compared to 1.955 million hectoliters in 2002. This was primarily due to a 1.2% increase in sales volume to the United States , the destination for most of our exports, in particular, our Tecate and Dos Equis brands. The export revenue per hectoliter increased 9.0% in peso terms, mainly as a result of a depreciation in real terms of the peso versus the U.S. dollar in 2003 and a price increase in U.S. dollar terms effective at the end of 2002.
Gross Profit
FEMSA Cerveza's increase in cost of sales remained in line with revenue growth. Cost of sales increased to Ps. 9.425 billion for 2003 from Ps. 9.281 billion during 2002. FEMSA Cerveza's gross profit totaled Ps. 12.499 billion resulting in a gross margin of 57.4%, a slight decrease of 20 basis points compared with the 2002 level of 57.6%. The margin was impacted by the currency effect due to an increase in U.S. dollar denominated costs, which represented approximately one-fourth of cost of sales, that was offset by: (i) better purchasing terms for raw materials, (ii) headcount adjustments and (iii) lower transportation costs from our breweries to the warehouses.
Income from Operations
FEMSA Cerveza's operating expenses increased by 2.0% to Ps. 8.522 billion in 2003, from Ps. 8.354 billion in 2002 and represented 38.9% of total revenues in 2003, compared to 38.6% of total revenues in 2002.
Administrative expenses increased by 3.1% to Ps. 2.333 billion in 2003, from Ps. 2.262 billion in 2002, reflecting mainly the start of the amortization of the ERP commercial module and its initial rollout.
Sales expenses increased by 1.6% to Ps. 6.189 billion in 2003, from Ps. 6.093 billion in 2002, primarily reflecting an increase in variable expenses that grew in line with our sales. At 28.2% of total revenues, sales expenses remained constant with the 2002 level of 28.2%.
Our participation in affiliated companies dropped by 65.9% relative to the previous year, primarily reflecting a reduction in the profitability of Labatt USA due to increased marketing spending for our brands Tecate and Dos Equis .
FEMSA Cerveza's income from operations, before deduction of management fees paid to us and to Labatt, decreased by 2.1% to Ps. 4.007 billion in 2003 from Ps. 4.094 billion in 2002. This is due to (i) lower gross profit margin, (ii) new amortizations of ERP related expenses and (iii) lower profitability at Labatt USA . In 2003, FEMSA Cerveza's operating margin before deduction of management fees decreased by 60 basis points to 18.3% of total revenues. Management fees amounted to Ps. 420 million and represented 1.9% of total revenues in 2003, compared to Ps. 407 million recorded in 2002, which represented 1.9% of total revenues in 2002. FEMSA Cerveza's income from operations after deduction of management fees amounted to Ps. 3.587 billion, 2.7% less than in 2002.
FEMSA Comercio
Total Revenues
Total revenues increased by 25.3% to Ps. 16.601 billion in 2003, from Ps. 13.247 billion during 2002. The increase of total revenues of FEMSA Comercio was mainly a result of the aggressive expansion of the Oxxo convenience store chain, which added 582 net new Oxxo stores during the year. The Oxxo chain brought the total number of stores nationwide up to 2,798, an increase of 26.3% from 2002. This increase is an average of a 30% increase in the number of stores in the central and southern regions of the country and a 24% increase in the north of Mexico .
Same-store sales of Oxxo increased 8.2% in 2003 reflecting an increase in the average consumer purchase of 1.7% and an increase in store traffic of 6.5%. This increase reflects the rapid expansion as well as stronger category management practices, such as tailoring the product offering at the store depending on its geographical location. This same-store sales calculation is different than what we have historically presented as “Sales of Comparative Mature Stores,” which reflected the variation in average sales of Oxxo stores that were then currently in operation for 18 consecutive months. Under our new methodology, we now calculate same-store sales by comparing the sales of stores for each year that have been in operation for at least thirteen months with the sales of those same stores during the previous year. This change in our methodology falls in line with industry standards of how same-store sales are calculated, is reflect annual report and will be our practice going forward.
Gross Profit
Cost of sales remained in line with revenue growth at Ps. 12.199 billion in 2003, from Ps. 9.739 billion in 2002, an increase of 25.3%. As a result, our gross margin was also stable relative to our growth in total sales at Ps. 4.402 billion in 2003, compared to Ps. 3.508 billion in 2002.
Income from Operations
Operating expenses increased by 24.8% to Ps. 3.621 billion in 2003, from Ps. 2.902 billion in 2002. These expenses remained practically flat as a percentage of total revenues at 21.8% in 2003 and 21.9% in 2002. Administrative expenses increased 12.1% to Ps. 285 million during 2003, from Ps. 254 million in 2002, as we adjusted our management structure to support our expanded operations. In particular, we opened two new regional administrative offices and now have 37 offices nationwide. Sales expenses increased 26.0% to Ps. 3.336 billion, compared to Ps. 2.647 billion in 2002. At 20.1% of our total revenues, this figure remained in line with 2002. This increase was due to the amortization of investments in technology and systems, as well as investments in distribution and workforce as we plan to strengthen the expansion of Oxxo's business model.
FEMSA Comercio's income from operations, before deduction of management fees, increased by 28.9% to Ps. 781 million in 2003, from Ps. 606 million in 2002. This increase was in line with sales growth and contributed to a stable operating margin of 4.7% for 2003, slightly above the 4.6% operating margin achieved in 2002. In 2003, management fees amounted to Ps. 87 million or 0.5% of total revenues compared to Ps. 99 million or 0.7% of total revenues in 2002. FEMSA Comercio's operating margin after deduction of management fees increased 0.4% to 4.2% of total revenues in 2003.
FEMSA Empaques
Total Revenues
FEMSA Empaques' total revenues increased by 7.1% to Ps. 7.352 billion in 2003, from Ps. 6.862 billion in 2002. This increase is primarily due to (i) a 7.7% increase in the sales volume of beverage cans, mainly to Coca-Cola FEMSA and FEMSA Cerveza, (ii) the currency effect of the depreciation of the Mexican peso, which offset a small decrease in the average price of these products in U.S. dollars, (iii) a surge in the sales volume of refrigerators shipped to the former Panamco territories and (iv) the production of plastic cases for a new 2.5 liter bottle for Coca-Cola FEMSA.
Gross Profit
FEMSA Empaques' cost of sales reached Ps. 5.639 billion during 2003 compared to Ps. 5.193 billion in 2002, resulting in a gross margin of 23.4% in 2003 compared to 24.4% in 2002. This decrease in gross margin is primarily due to (i) an increase in the cost of U.S. dollar-denominated raw materials, (ii) an increase in depreciation expenses related to the molds used to produce the cases for 2.5 liter plastic bottles and the replacement of one of the glass furnaces replaced early 2003 and (iii) higher energy costs.
Income from Operations
Operating expenses decreased by 1.6% to Ps. 614 million in 2003 from Ps. 624 million in 2002 and decreased only 70 basis points as a percentage of total revenues to 8.4% in 2003. Administrative expenses decreased by 8.2% to Ps. 177 million in 2003 compared to Ps. 193 million in 2002, due to a decrease in the personnel level, along with the optimization of certain administrative processes. Sales expenses increased 1.4% to Ps. 437 million in 2003 compared to Ps. 431 million in 2002, mainly as a result of higher freight costs due to the increased sales volume of refrigerators and plastic cases.
Income from operations, before deduction of management fees, increased by 5.1% to Ps. 1.098 billion in 2003 compared to Ps. 1.045 billion in 2002. This resulted in an operating margin, before reduction of management fees, of 14.9% of total revenues, 0.3% less than in 2002. In 2003, management fees amounted to Ps. 111 million, or 1.5% of total revenues, compared to Ps. 103 million recorded in 2002, 1.5% of total revenues. FEMSA Empaques' operating margin, after deduction of management fees, was 13.4% in 2003, compared to 13.7% in 2002.
FEMSA Consolidated–Net Income
Integral Cost of Financing
Net interest expense during 2003 amounted to Ps. 1.845 billion compared to Ps. 478 million in 2002, resulting primarily from the interest expense related to new debt issued by Coca-Cola FEMSA in order to finance the acquisition of Panamco.
Foreign exchange gain (loss) during 2003 amounted to a loss of Ps. 2.532 billion compared to a loss of Ps. 293 million in 2002. This amount primarily reflects our higher U.S. dollar-denominated liabilities resulting from the new debt incurred for our recent acquisition of Panamco and a 3.3% depreciation in real terms of the Mexican peso versus the U.S. dollar during the year.
Monetary position gain (loss) during 2003 amounted to a gain of Ps. 954 million, compared to a gain of Ps. 398 million during 2002. Most of the additional gain is attributable to the inflation rate over the liabilities attained from the various territories in our recent acquisition. To determine changes in monetary position, we reflect adjustments for inflation over the year such that monetary assets and liabilities obtained or disposed of during the year are not eroded.
Tax recognized during 2003 amounted to Ps. 3.378 billion, which includes income tax, tax on assets, and employee profit sharing compared to Ps. 3.764 billion in 2002. The effective tax rate for the year was 42.0% and compares favorably with the 44.0% effective tax rate of 2002.
Net Income
Our consolidated net income decreased 2.8% to Ps. 4.657 billion from Ps. 4.791 billion for 2002, mainly attributable to a foreign exchange loss. Consolidated net majority income amounted to Ps. 3.093 billion for the year 2003, which is 5% higher than 2002. Net majority income per FEMSA Unit was Ps. 2.919 for 2003. Net majority income per FEMSA ADS, considering an exchange rate of Ps. 11.235 per dollar, was 2.598 U.S. dollars for 2003.
Results of Operations for the Year Ended December 31, 2002
Compared to the Year Ended December 31, 2001
FEMSA Consolidated
Total Revenues
FEMSA's consolidated total revenues increased by 5.6% to Ps. 55.395 billion for the year ended December 31, 2002, from Ps. 52.465 billion for the year ended December 31, 2001. Consolidated net sales increased by 5.5% to Ps. 55.176 billion in 2002, from Ps. 52.301 billion in 2001 and represented 99.6% of total revenues in 2002, compared to 99.7% in 2001. FEMSA Comercio, whose total revenue increased 18.7%, contributed significantly to the growth in consolidated revenue with the opening of 437 net new Oxxo stores, and Coca-Cola FEMSA, whose total revenues grew 5.0%, was also a significant contributing factor. FEMSA Cerveza faced weak demand in the northern markets throughout the year, but posted revenue growth of 0.5% aided by steady demand and successful performance in the central and southern markets. FEMSA Empaques capitalized on strong demand for its main product lines in the second half of the year and closed t he year with 0.3% growth in revenue.
Gross Profit
Our consolidated gross profit increased by 5.2% to Ps. 27.755 billion in 2002 from Ps. 26.395 billion in 2001. As gross profit increased at a slightly lower rate than net sales, our consolidated gross profit margin was 50.3%, a decrease of 0.2% over 2001. In addition, our U.S. dollar-linked variable cost of sales became more expensive on a real basis because of the depreciation of the Mexican peso in the second half of 2002. The decrease in gross profit margin was only partially offset by operational efficiencies achieved in our manufacturing facilities, such as increased productivity and strategic procurement.
Income from Operations
Our consolidated operating expenses (including goodwill amortization and management fees paid to Labatt) increased by 2.5% in 2002 to Ps. 17.964 billion, from Ps. 17.527 billion in 2001. As a percentage of total revenues, consolidated operating expenses decreased by 100 basis points to 32.4% in 2002.
Consolidated administrative expenses increased by 1.2% to Ps. 4.870 billion in 2002 from Ps. 4.814 billion, primarily reflecting the net effect of the following:
- increases in administrative expenses at Coca-Cola FEMSA, mainly reflecting investments in preparation for a large acquisition, such as administrative consultants and expanding managerial staff, plus certain system upgrades in Mexico ;
- slight increases in administrative expenses at FEMSA Comercio, related to its expansion, and at FEMSA Empaques, reflecting investments in ERP systems; and
- slight decrease in FEMSA Cerveza's administrative expenses as a result of efforts to contain expenses.
Some of our subsidiaries pay management fees to FEMSA in consideration for corporate services provided to such subsidiaries. Our subsidiaries' payments of management fees are eliminated in consolidation and thus have no effect on our consolidated operating expense, with the exception of the management fee paid by FEMSA Cerveza to Labatt, which amounted to Ps. 122 million in 2002 compared to Ps. 129 million in 2001. Goodwill amortization corresponding to Coca-Cola FEMSA amounted to Ps. 40 million in 2002 compared to Ps. 106 million in 2001, reflecting the goodwill impairment related to Coca-Cola FEMSA Buenos Aires.
Consolidated sales expenses increased by 3.0% to Ps. 13.094 billion in 2002 from Ps. 12.713 billion in 2001, mainly reflecting the combination of:
- growth in FEMSA Comercio's sales expenses as the chain expands at a rapid pace, requiring a proportional operating expense infrastructure and a larger infrastructure required to manage the expansion of the chain; and
- reduction in Coca-Cola FEMSA's sales expenses reflecting expense containment measures in Mexico and lower marketing expenses and payroll optimization in Argentina .
We incur various expenses related to the distribution of our products. We include these types of costs in the sales expenses line of our income statement. During 2002 and 2001, our distribution costs amounted to Ps. 4.092 billion and Ps. 4.013 billion, respectively. The exclusion of these charges from our cost of sales line may result in the amounts reported as gross profit not being comparable to other companies, which may include all expenses related to their distribution network in cost of sales when computing gross profit (or an equivalent measure).
All of our principal businesses reported increases in their respective income from operations, which produced growth in consolidated income from operations (after participation in the results of affiliated companies) for the full year 2002 of 11.0% to Ps. 9.878 billion from Ps. 8.902 billion in 2001. Our consolidated operating margin increased 0.8% to 17.8% of consolidated total revenues. Coca-Cola FEMSA was our primary driver of profitability growth, posting a 14.0% increase in its income from operations. FEMSA Cerveza and FEMSA Comercio each generated similar amounts of incremental operating profit in 2002, contributing to the consolidated result with growth rates of 5.3% and 44.3%, respectively, in their operating income (before management fees).
Coca-Cola FEMSA
Total Revenues
Coca-Cola FEMSA recorded net sales of Ps. 18.519 billion in 2002, a 5.0% increase over net sales of Ps. 17.637 billion in 2001. Revenue growth was primarily attributable to strong volume growth and a steady improvement in the average price per unit case in Mexico , which more than offset the volume contraction observed in Argentina . Other revenues, which consist mainly of income from toll production agreements with a neighboring Coca-Cola Bottler in Argentina , whereby Coca-Cola FEMSA has been producing Coca-Cola brand beverages for sale in its territories, amounted to Ps. 149 million in 2002, 10.1% higher than in 2001. Total revenues for Coca-Cola FEMSA increased by 5.0% to Ps. 18.668 billion in 2002 from Ps. 17.773 billion in 2001.
Coca-Cola FEMSA recorded volume growth of 5.6% to 505 million unit cases in Mexico and an improvement in the real revenue per unit case of 1.1% during 2002. These improvements resulted in revenue growth of 6.7% to Ps. 16.843 billion in Mexico for 2002. We believe that the principal volume drivers in Mexico in 2002 were:
- strong performance of Mundet beverages and still water, particularly the new 5-liter jug of Ciel;
- continued expansion in the flavor and “new categories” segments with the introduction of new and exciting products, such as Beat , Mundet , Mickey Adventuras , Kin Light and Nestea ; and
- modest volume growth in the core cola portfolio.
In Argentina , Coca-Cola FEMSA operated in a very depressed economic environment in 2002. Volume decreased by 11.0% to 116 million unit cases in a year that started off with a severe economic crisis that hampered demand for our products. Coca-Cola FEMSA responded to this challenging market with the objectives of defending the brand equity of its brands, regaining market share from “B” Brands, extracting positive cash flow and performing overall damage containment. As the year progressed, the commercial strategies implemented by Coca-Cola FEMSA yielded a more favorable outcome, closing the year with volume growth in the fourth quarter of 2002. The principal strategies implemented were:
- shifting the mix back to returnable packages, which jumped from 5.8% of the mix in 2001 to 12.4% in 2002, led by the 1.25-liter glass returnable presentation of Coca-Cola , Fanta and Sprite ; and
- continuing to promote the core Coca-Cola brand while further developing the value protection brands ( Taí and Crush ).
Together these strategies allowed Coca-Cola FEMSA to defend its pricing structure and produced an increase in average revenue per unit case of 2.1% in 2002 compared to 2001. The reduction in total revenue was limited to 8.2%.
Gross Profit
Coca-Cola FEMSA's cost of sales increased by 5.1% to Ps. 8.681 billion in 2002, from Ps. 8.256 billion in 2001, and its gross profit increased by 4.9% to Ps. 9.987 billion, from Ps. 9.517 billion in 2001. Gross margin expanded by 0.1% to 53.9% in 2002. Coca-Cola FEMSA's Mexican operations experienced a gross margin expansion of 0.9% for the full year 2002, resulting mainly from solid revenue growth characterized by greater fixed cost absorption as a result of growth in volumes. The Argentine operation's gross margin dropped 9.8% to 36.0% of net sales for the full year 2002, due to lower absorption of fixed costs as a result of lower volumes, higher prices of raw materials and a larger depreciation charge in Argentina in connection with the reevaluation of fixed assets of foreign origin as a consequence of the devaluation of the Argentine peso.
Income from Operations
Operating expenses for 2002 decreased by 0.6% to Ps. 5.320 billion. As a percentage of total revenues, operating expenses decreased 1.6% to 28.5% in 2002. Administrative expenses in Mexico remained flat as a proportion of total revenues when compared to 2001; in absolute terms, these expenses increased 7.9% mainly reflecting investments in preparation for a large acquisition, such as systems upgrades, administrative consultants and reinforcing managerial staff. Administrative expenses for Argentina grew 17.2% relative to 2001, due mainly to higher depreciation in local currency in connection with a reevaluation of our foreign currency-denominated assets. Selling expenses for Coca-Cola FEMSA in Mexico increased by 0.2% in 2002, which represents a reduction of 1.3% relative to total revenues, reflecting improvements in operations in Mexico . Selling expenses also decreased in Argentina in 2002, as a result of lower marketing expenses a nd headcount reduction combined with adjusted salar ies.
Goodwill amortization for 2002 was Ps. 40.4 million compared to Ps. 106.2 million for 2001, reflecting impairment in the goodwill as a result of the difficult economic situation in Argentina . In July 2002, Coca-Cola FEMSA recorded an impairment of Ps. 457 million. Until 2002, under Mexican GAAP, goodwill is amortized gradually in the income statement through a straight-line method for a 20-year period. Coca-Cola FEMSA's income from operations after amortization of goodwill increased by 14.0% to Ps. 4.627 billion in 2002, from Ps. 4.057 billion in 2001, reflecting the net effect of the following:
- an increase of 15.5% in income from operations of Coca-Cola FEMSA's Mexican operations; and
- a decline of 66.6% in income from operations of Coca-Cola FEMSA's Argentine operations.
Coca-Cola FEMSA's operating margin increased by 2.0% to 24.8% of total revenues in 2002 from 22.8% of total revenues in 2001.
FEMSA Cerveza
Total Revenues
FEMSA Cerveza's net sales increased by 0.4% to Ps. 21.453 billion in 2002 from Ps. 21.367 billion in 2001. Other revenues, which consist mainly of income from the sale of manufacturing byproducts and sundries in retail locations owned by FEMSA Cerveza, totaled Ps. 189 million in 2002, 20.2% higher than in 2001. Total revenues for FEMSA Cerveza increased by 0.5% to Ps. 21.642 billion in 2002, from Ps. 21.529 billion in 2001. The increase in revenues in 2002 was primarily attributable to the net effect of the following:
- 0.2% decrease in total sales volume; and
- 0.6% improvement in real total revenue per hectoliter sold for the full year 2002, derived primarily from a 7.0% nominal increase in the domestic price of beer (on a weighted average basis) implemented during the first quarter of 2002. FEMSA Cerveza's average revenue per hectoliter in 2002 was Ps. 901.0, including domestic and export sales.
Domestic volume declined by 0.7% to 21.856 million hectoliters, as FEMSA Cerveza continued to experience the adverse effects of the deterioration in disposable income in the northern region of Mexico. FEMSA Cerveza has greater exposure to the markets in the northern regions, where it sells approximately 56% of its domestic volume. Over the past two years we have observed a progressive deterioration in the economy that has disproportionately affected the northwest region, as its higher concentration of border towns makes it more susceptible to the U.S. economy. The central and southern regions have been more protected from this economic slowdown. For example, we estimate that employment in the manufacturing and retail industries in the north declined approximately 4.6% in 2002, compared to an estimated decline of 0.3% and 0.4% in the central and southern regions, respectively. At the same time, our sales volumes in the north declined 2.9%, while those in the rest of the country grew by approximately 1.9%. Another factor that materially affected our ability to sell more of our beer products in the north was a higher presence of beer imports, particularly during the period of Mexican peso appreciation against the U.S. dollar in the first half of 2002. On a quarterly basis, domestic volume trends were as follows: a 2.2% volume decline in the first quarter, marginal growths of 0.1% and 0.3% in the second and third quarters, respectively, and a decline of 1.3% in the fourth quarter of 2002, all relative to the comparable quarters of 2001. Pricing in the domestic market increased by 0.9% in real terms, averaging Ps. 921 per hectoliter in 2002.
Export volume grew by 6.1% to 1.955 million hectoliters in 2002 and represented 8.2% of the total volume sold by FEMSA Cerveza. Volume sold to North America , FEMSA Cerveza's main export market, increased by 8.2% and accounted for 92.2% of FEMSA Cerveza's export volume. Export volume to Europe and Asia declined 17.6% and 25.7%, respectively, compared to 2001 and accounted for 2.9% and 2.8% of total export sales. Average pricing in the export market decreased by 2.2% in real terms, averaging Ps. 679 per hectoliter in 2002. Export revenues increased by 3.7% to Ps. 1.327 billion in 2002 and in U.S. dollar terms, export revenues increased by 3.7% to US$127 million.
In 2002, we adopted EITF Consensus No. 01-9, “Accounting for Consideration Given By a Vendor to a Customer or Reseller of the Vendor's Products,” issued by the FASB. This consensus requires certain sales expenses incurred by FEMSA Cerveza previously classified as operating expenses to be reclassified as deductions from revenue. Amortizations that were previously classified as sales expenses in the amount of Ps. 885 million for 2001 were reclassified as a reduction in net sales in accordance with this EITF consensus. Correspondingly, during 2002 we classified Ps. 990 million as a reduction in net sales.
Gross Profit
FEMSA Cerveza's cost of sales for 2002 remained flat at Ps. 9.281 billion compared to 2001. FEMSA Cerveza's gross profit increased by 1.0% to Ps. 12.361 billion in 2002, from Ps. 12.244 billion in 2001. As a percentage of net sales, gross margin increased by 30 basis points to 57.6% in 2002, reflecting enhancements in manufacturing productivity and savings in the plant-to-warehouse logistics. Cost trends for FEMSA Cerveza's principal raw materials (malting barley, hops, aluminum cans and glass bottles) remained relatively stable throughout 2002. The favorable effect of the appreciation of the Mexican peso against the U.S. dollar on U.S. dollar-denominated costs during the first half of the year was more than offset by a depreciation of the Mexican peso against the U.S. dollar during the latter half of 2002.
Income from Operations
FEMSA Cerveza's operating expenses decreased by 0.4% to Ps. 8.354 billion in 2002 from Ps. 8.390 billion in 2001 and represented 38.6% of total revenues in 2002, compared to 39.0% of total revenues in 2001. Administrative expenses decreased by 0.7% to Ps. 2.262 billion in 2002 from Ps. 2.277 billion in 2001, reflecting continued expense containment practices across the organization and an average headcount reduction. Selling expenses decreased by 0.3% to Ps. 6.093 billion in 2002 and represented 28.2% of total revenues. Our success in containing sales expenses and generating operational savings resulted from the following:
- warehouse rationalization across all markets;
- presale logistics, which by separating the sales and delivery functions have reduced significantly unsold load in delivery trucks; and
- improved resource utilization, which resulted in a net reduction of sales routes.
FEMSA Cerveza has continued to invest in the development of its new competitive business model, which has entailed budgeted expenditures in information technology platforms (including the ERP system), acquisition of third party distributorships, high-impact marketing campaigns and deployment of commercial equipment (such as refrigerators and point-of-sale displays). See “Item 4. Information on the Company-FEMSA Cerveza-Business Strategy.”
FEMSA Cerveza recorded Ps. 87 million in 2002 for participation in the results of affiliated companies (including Labatt USA ) compared to Ps. 34 million in 2001. FEMSA Cerveza's income from operations, before deduction of management fees paid to us and to Labatt, increased by 5.3% to Ps. 4.094 billion in 2002 over Ps. 3.888 billion recorded in 2001. In 2002, FEMSA Cerveza's operating margin before deduction of management fees increased 0.8% to 18.9% of total revenues. Management fees amounted to Ps. 407 million and represented 1.9% of total revenues in 2002 compared to Ps. 430 million recorded in 2001, which represented 2.0% of total revenues in 2001. FEMSA Cerveza's income from operations after deduction of management fees amounted to Ps. 3.687 billion, 6.6% more than in 2001.
FEMSA Comercio
Total Revenues
FEMSA Comercio's total revenues increased by 18.7% in 2002 to Ps. 13.247 billion, from Ps. 11.160 billion in 2001. The increase of total revenues of FEMSA Comercio was mainly a result of the aggressive expansion of the Oxxo convenience store chain, which added 437 net new stores during the year. We believe that the strong revenue growth rate of the Oxxo chain is primarily attributable to:
- site scouting capabilities;
- nationwide presence;
- efficient store setup model; and
- aggressive expansion and saturation business plan.
The Oxxo chain brought the total number of stores up to 2,216 by year-end 2002. As the chain grows, we have discovered new market opportunities in urban centers with high pedestrian traffic, such as hospitals and convention centers, and are increasingly exploiting the convenience store/gasoline station format. Same-store sales increased by 6.0% with respect to 2001. Same-store sales in our northwestern markets-which have the highest border town concentration-performed weakly in 2002. In contrast, the central and southern regions of the country have experienced significant same-stores sales growth during 2002. Growth in the northwest was affected by:
- economic sluggishness characterized by high rates of unemployment;
- the strength of the peso during the first semester of 2002 which induced consumers to purchase sundries across the border in U.S. territory; and
- high differentials in the price of gasoline between Mexico and the U.S. that caused Mexicans to buy gasoline and therefore convenience store products in the U.S. ( Mexico being materially more expensive until corrective measures were taken in major border towns in December 2002).
Average monthly traffic per store (within the same-store sample) increased by 4.7% and the average sale per customer decreased by 1.3% during the full year 2002. We believe that these increases are mainly attributable to:
- FEMSA Comercio's strategy of competitively pricing traffic-generating products;
- improvement in the value proposition to Oxxo's customers, including cross promotions, product introductions, and store enhancements; and
- Oxxo becoming a reliable payment center where our customers can pay most home utilities in one stop.
Gross Profit
FEMSA Comercio recorded gross profit of Ps. 3.508 billion for the full year 2002, a 22.4% gain over the Ps. 2.867 billion recorded in 2001. Gross margin improved 0.8% to 26.5% of net sales, as compared to 25.7% for 2001, as the additional scale has also allowed us to establish strategic alliances with some of our suppliers and thereby reduce costs. In addition, our successful category management execution and our growing ability to work jointly with our supplier partners to design differentiated assortment, pricing and promotions have contributed to gross margin expansion.
Income from Operations
Operating expenses increased by 18.7% to Ps. 2.902 billion in 2002, from Ps. 2.445 billion in 2001 and remained flat as a percentage of total revenues at 21.9% in both 2002 and 2001. Administrative expenses increased by only 5.4% to Ps. 254 million, as the increased costs associated with expansion were mitigated by higher absorption of fixed administrative costs as more stores were opened in cities where there is already an Oxxo administrative infrastructure. Selling expenses increased 20.1% to Ps. 2.647 billion, slightly above total revenue growth, reflecting higher expenditures associated with the infrastructure required to manage the expansion of the chain. FEMSA Comercio recorded income from operations, before deduction of management fees, of Ps. 606 million in 2002, an increase of 44.3% from the Ps. 420 million recorded in 2001. FEMSA Comercio's operating margin before management fees grew 0.8% to 4.6% o f total revenues in 2002 from 3.8% in 2001. In 2002, management fees amounted to Ps. 99 million or 0.7% of total revenues compared to Ps. 111 million or 1.0% of total revenues in 2001. FEMSA Comercio's operating margin after deduction of management fees increased by 1.0% to 3.8% of total revenues in 2002.
FEMSA Empaques
Total Revenues
FEMSA Empaques' total revenues increased 0.3% to Ps. 6.862 billion in 2002 from Ps. 6.840 billion in 2001, which was mainly attributable to a surge in demand in beverage cans and glass bottles coupled with the favorable effect of the weaker Mexican peso on our U.S. dollar revenues in the second half of the year. These increases offset slower demand for our packaging products in the first six months of 2002. For the full year, average capacity utilization was close to full in all of our main product lines.
Beverage can volumes reversed the weakness observed during 2001 by posting a growth of 6.8% in sales volume to 3.000 billion can units in 2002. In the second half of the year, the beverage can unit experienced increased demand from its main commercial partners domestically and abroad: FEMSA Cerveza, Coca-Cola FEMSA and Ball. We met this demand by reducing our sales to smaller domestic third party clients. Average real prices for beverage cans, which are quoted in U.S. dollars, decreased by approximately 0.6%, following a multi-year trend of convergence with international prices for these products.
Glass bottle volumes grew a solid 8.4% to 1.053 billion bottle units in 2002, while Mexican peso-denominated prices decreased 1.4%. FEMSA Empaques has encountered very high demand for its glass products domestically, since there is currently almost no excess capacity in the industry. Coca-Cola FEMSA purchased a larger number of 8 oz non-returnable glass Coca-Cola contour bottles. Supply of internal clients rose from 68.4% in 2001 to 89.2% in 2002. FEMSA Empaques commenced an inventory buildup during the fourth quarter of 2002 in preparation for the scheduled replacement of one of its glass furnaces in the first quarter of 2003, which involved approximately 85 days of inactivity.
Sales volumes for crown caps increased 1.8% in 2002 despite the decline in demand for crown caps in the domestic market, reflecting FEMSA Empaques' success in the export markets, particularly in the North American market, where FEMSA Empaques is a major crown cap supplier for Labatt, Miller Brewing Company and Coors Brewing Company. FEMSA Empaques increased its crown cap export ratio from 51% in 2001 to a record 55% in 2002.
Export revenues increased by 12.2% to Ps. 749 million and represented 10.9% of net sales in 2002. In U.S. dollar terms, export revenues increased by 12.4% to US$71.7 million.
Gross Profit
FEMSA Empaques' cost of sales decreased by 1.3% to Ps. 5.193 billion in 2002 from Ps. 5.259 billion in 2001, mainly due to the following factors:
- efficiencies achieved in the manufacturing lines that resulted in less spoilage and lower headcount;
- consistency in the average contracted price of steel sheets; and
- slight declines in the average price for bulk aluminum and ancillary raw materials.
Gross profit increased by 5.6% to Ps. 1.669 billion in 2002 from Ps. 1.581 billion in 2001, resulting in a gross margin expansion of 1.3% to 24.4% of net sales in 2002, as compared to 23.1% in 2001. Improvement in gross profit is closely related to exchange rate fluctuations: as the Mexican peso depreciated against the U.S. dollar towards the end of the year, U.S. dollar-denominated income for metallic products increased at a faster rate than costs, which have significant Mexican peso-denominated components. FEMSA Empaques is gradually recovering its long-term gross margin level, which has reached as high as 25.4% in the last five years, by means of implementing high productivity measures in the manufacturing plants such as the elimination of line personnel and middle management and application of ERP systems.
Income from Operations
Operating expenses increased by 6.5% to Ps. 624 million in 2002 from Ps. 586 million in 2001 and increased only 0.5% as a percentage of total revenues to 9.1% in 2002. For the full year 2002, FEMSA Empaques recorded parallel increases in sales expenses and administrative expenses of 7.0% and 5.5%, respectively. The increase in sales expenses is mainly attributable to higher shipment costs. The increase in administrative expenses is mainly attributable to the one-time implementation costs of ERP modules in Famosa.
Income from operations before deduction of management fees increased by 5.0% to Ps. 1.045 billion in 2002, from Ps. 995 million for 2001, primarily reflecting the growth in gross profit. FEMSA Empaques recorded an operating margin before deduction of management fees of 15.2% in 2002, compared to a 14.5% margin recorded in 2001. In 2002, management fees amounted to Ps. 103 million, or 1.5% of total revenues, compared to Ps. 105 million recorded in 2001, also 1.5% of total revenues. FEMSA Empaques' operating margin after deduction of management fees was 13.7% in 2002 compared to 13.0% in 2001. Operating margin was significantly affected in the first quarter of 2002, under a considerably strong Mexican peso scenario, but rebounded to record levels in the second and third quarters, as the Mexican peso depreciated.
FEMSA Consolidated-Net Income
Our consolidated net income decreased by 8.1% to Ps. 4.791 billion in 2002, from Ps. 5.215 billion recorded in 2001. The decrease in net income recorded for the full year 2002 resulted from the net effect of:
- an 11.0% increase in consolidated income from operations;
- the write-off of a portion of our goodwill related to the acquisition of Coca-Cola FEMSA Buenos Aires;
- a significant increase in the consolidated integral result of financing loss, primarily in connection with the devaluation of the Mexican peso against the U.S. dollar in the second half of the year; and
- a larger tax provision.
Goodwill
In view of the continued deterioration and uncertainty in Argentine economic conditions, we decided to take a more conservative approach in the valuation of the goodwill related to our investments in that country. Therefore, in the third quarter we wrote down Ps. 457 million related to the acquisition of the territories of Coca-Cola FEMSA Buenos Aires. In view of the prevailing volatility of the Argentine currency, we also decided to take a conservative approach and stop considering our investment in Coca-Cola FEMSA Buenos Aires as a hedge for the U.S. dollar-denominated liabilities incurred in connection to this acquisition, thereby affecting the integral cost of financing for 2002 in the foreign exchange and monetary position calculations. These adjustments were non-cash.
Integral Cost of Financing
In the twelve months ended December 31, 2002, we recorded a consolidated integral cost of financing of Ps. 373 million, compared to a consolidated integral cost of financing of Ps. 274 million for the comparable period in 2001. In 2002, consolidated net financial expense decreased by 2.0% to Ps. 478 million as compared to Ps. 488 million in 2001. Consolidated interest expense decreased by 4.3% to Ps. 943 million compared to 2001, mainly attributable to lower average real rates for our liabilities, although our average gross liabilities increased by 3.4% in 2002 and the U.S. dollar portion was subsequently affected by the devaluation of the peso against the dollar that occurred in the second half of the year. This was partially compensated by the reduction in consolidated interest income, which decreased by 6.4% to Ps. 465 million reflecting the net effect of lower interest rates earned on our investments rela tive to the year 2001 and a larger average cash position in Mexican pesos. As of December 31, 2002, our weighted average cost of debt was 6.9%, approximately 0.9% lower than the weighted average cost of debt as of December 31, 2001.
For the year 2002, we recorded a consolidated foreign exchange loss of Ps. 293 million compared to a foreign exchange gain of Ps. 256 million for the year 2001, primarily reflecting:
- the effect of the depreciation of the Mexican peso against the U.S. dollar, which totaled Ps. 1.28 per U.S. dollar in the year, on our net dollar liabilities in Mexico, compared to an appreciation of Ps. 43 cents on higher net U.S. dollar liabilities observed in 2001; and
- the depreciation of the Argentine peso against the U.S. dollar on our net U.S. dollar assets in Argentina, which had a positive effect on the foreign exchange
variation during 2002.
The gain on monetary position for the year 2002 amounted to Ps. 398 million, compared to a loss of Ps. 42 million in 2001. This gain was mainly generated as a result of the inflation rate for the twelve months in Argentina over the debt incurred in connection with the acquisition of Coca-Cola FEMSA Buenos Aires. The Argentine inflation rate for 2002 was 41.2%. It should be noted that the Argentine goodwill impairment, as explained above, had an impact on the foreign exchange variation and monetary position lines.
Other Expenses
Our consolidated other expenses for the year 2002 amounted to Ps. 950 million, consisting mainly of the aforementioned impairment of a portion of the goodwill on our investments in Argentina charged in the third quarter, plus severance payments and asset write-offs.
Income Tax, Tax on Assets, and Employee Profit Sharing
Our consolidated income before income tax, tax on assets and employee profit sharing increased by 2.9% to Ps. 8.555 billion in 2002 from Ps. 8.314 billion in 2001, primarily reflecting a larger consolidated integral result of financing loss. We recognized consolidated income tax, tax on assets and employee profit sharing of Ps. 3.764 billion in 2002, an increase of 22.6% over the Ps. 3.069 billion in 2001. This increase was primarily a consequence of an increase of 24.8% in our income tax, largely resulting from a deferred tax benefit realized in 2001 as a result of a reduction in the Mexican statutory income tax rate, the increase in non-deductible expenses generated in the course of business and the impairment to the goodwill generated by the acquisition of Coca-Cola FEMSA Buenos Aires. The combined effective tax rate for 2002 was 44.0%.
Net Income
Our consolidated net income decreased by 8.1% amounting to Ps. 4.791 billion for 2002 compared with Ps. 5.215 billion recorded in 2001, combining the improvement in consolidated income from operations, the goodwill write-off, an increase in the consolidated integral result of financing loss, and a larger tax provision. Consolidated net majority income amounted to Ps. 2.947 billion for 2002, a reduction of 16.9% as compared with Ps. 3.547 billion recorded in 2001. Net majority income per FEMSA Unit amounted to Ps. 2.781 in 2002, compared with Ps. 3.348 for 2001.
Liquidity and Capital Resources
Liquidity
Each of our subholding companies finances its operational and capital requirements. As of December 31, 2003, 100% of our outstanding consolidated indebtedness was at the level of our subholding companies. This structure is attributable, in part, to the inclusion of third parties in the capital structure of both FEMSA Cerveza and Coca-Cola FEMSA. Currently, we expect to continue to finance our operations and capital requirements primarily at the level of our subholding companies. Nonetheless, we may decide to incur indebtedness at our holding company in the future to finance the operations and capital requirements of our subsidiaries or significant acquisitions, investments or capital expenditures. As a holding company, we would depend on dividends and other distributions from our subsidiaries to service any such indebtedness.
The principal source of liquidity of each subholding company has generally been cash generated from operations. We have traditionally been able to rely on cash generated from operations because a significant majority of the sales of FEMSA Cerveza, 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 proportion of their initial and ongoing inventories with supplier credit. Our principal use of cash has generally been for capital expenditure programs, debt repayments and dividend payments. The following is a summary of the principal uses of cash for the three years ended December 31, 2003:
Principal Uses of Cash
| For the Year Ended December 31, (Millions of Constant Pesos) |
|||
| 2003 |
2002
|
2001
|
|
| Net resources generated by operations | Ps. 8,858 | Ps. 9,773 | Ps. 10,056 |
| Capital expenditures (1) | (6,789) | (5,780) | (5,531) |
| Bank loans, notes and interest payable | 15,659 | 5,700 | (529) |
| Dividends declared and paid | (1,070) | (1,185) | (657) |
| (1) | Includes property, plant and equipment plus intangible assets and other. |
Our subholding 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 our subholding companies may affect the subholding company's ability to fund its capital requirements. A significant and prolonged deterioration in the economies in which we operate or in our businesses may affect our ability to obtain short-term and long-term credit or to refinance existing indebtedness on terms satisfactory to us.
We have traditionally financed significant acquisitions, principally Coca-Cola FEMSA's acquisition of Coca-Cola Buenos Aires in 1994 and more recently its acquisition of Panamco in May 2003, capital expenditures and other capital requirements that could not be financed with cash from operations by incurring long-term indebtedness.
Our total consolidated indebtedness was Ps. 38,361 million as of December 31, 2003, as compared to Ps. 14,354 million as of December 31, 2002. Cash and cash equivalents were Ps. 7,733 million as of December 31, 2003, as compared to Ps. 15,148 as of December 31, 2002. The significant increase in total indebtedness was primarily at Coca-Cola FEMSA and was attributable to the acquisition of Panamco in May 2003.
We believe that our sources of liquidity as of December 31, 2003 were adequate for the conduct of our subholding companies' businesses and that we will have sufficient funds available to meet our expenditure demands and financing needs in 2004.
Off-balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
Contractual Obligations
The table below sets forth our significant long-term contractual obligations as of December 31, 2003:
Contractual Obligations As of December 31, 2003 In Millions of Mexican pesos |
|||||
| Maturity
|
|||||
| Less than 1 year | 1-3 years | 4 -5 years | In excess of 5 years | Total | |
| Long-Term Debt | |||||
|
225 | 7,435 | 9,011 | 1,500 | 18,171 |
|
2,362 | 8,988 | 2,298 | 3,528 | 17,176 |
|
- | 448 | 138 | - | 586 |
| Interest Payments (1) | |||||
|
1,418 | 2,558 | 1,414 | 154 | 5,544 |
|
936 | 1,514 | 637 | 250 | 3,337 |
|
61 | 93 | 15 | - | 169 |
| Operating Leasing Commitments | |||||
|
437 | 830 | 775 | 2,948 | 4,990 |
|
418 | 641 | 372 | 417 | 1,848 |
| Price Commodity Contracts | 580 | 123 | - | - | 703 |
| Contributions to the Pension Plan and post-retirement medical services (2) | 90 | 180 | 180 | 900 | 1,350 |
| (1) | Assuming long-term debt and exchange rate as of December 31, 2003. |
| (2) | Assuming Ps. 90 million per year in the next 10 years. Based on actuarial calculations and contributions made by us in previous years. |
As of December 31, 2003, Ps. 2,428 million of our total consolidated indebtedness was due within one year and Ps. 35,933 million was long-term debt. As of December 31, 2003, our consolidated average cost of borrowing was approximately 6.5% compared to an average cost of borrowing of 6.9% in 2002. The decrease in our average cost of borrowing mainly reflects a decrease in the London interbank offered rate, or LIBOR, a benchmark rate used for Eurodollar loans. As of December 31, 2003, 47.8% of our consolidated indebtedness was denominated and payable in U.S. dollars, 50.6% was in Mexican pesos and the remainder 1.6% was in Colombian pesos. We did not have any “Purchase Obligations” nor “Capital (Finance) Lease Obligations” as of December 31, 2003.
Overview of Debt Instruments
The following table shows the allocations of debt of our company:
| Debt Profile of the Company As of December 31, 2003 |
||||||
FEMSA and Others
|
Coca-Cola FEMSA
|
FEMSA Cerveza
|
FEMSA Comercio (2)
|
FEMSA Empaques (2)
|
Total Debt
|
|
| Short-term Debt | ||||||
| U.S. dollars: | ||||||
|
Ps. - | Ps. 753 | Ps. - | Ps. 57 | Ps. 457 | Ps. 1,267 |
|
- | - | - | - | 225 | 225 |
| Mexican pesos: | ||||||
|
- | 905 | 31 | - | - | 936 |
| Long-term Debt (1) | ||||||
| U.S. dollars: | ||||||
|
24 | 5,676 | 1,882 | - | 110 | 7,692 |
|
- | 5,680 | - | - | - | 5,680 |
|
- | 1,124 | - | - | - | 1,124 |
|
- | 32 | - | - | 194 | 226 |
|
- | - | - | 1,477 | 910 | 2,387 |
|
67 | - | - | - | - | 67 |
| Mexican pesos: | ||||||
|
- | 2,741 | 3,749 | - | 263 | 6,753 |
|
- | 10,000 | - | - | - | 10,000 |
|
- | 1,418 | - | - | - | 1,418 |
| Colombian pesos: | ||||||
|
- | 586 | - | - | - | 586 |
| Total | Ps. 91
|
Ps. 28,915
|
Ps. 5,662
|
Ps. 1,534
|
Ps. 2,159
|
Ps. 38,361
|
| Average Cost | ||||||
|
3.6% | 5.9% | 3.8% | 3.0% | 3.3% | 5.2% |
|
- | 7.4% | 9.0% | - | 6.1% | 7.7% |
|
- | 10.3% | - | - | - | 10.3% |
| Total | 3.6%
|
6.8%
|
7.3%
|
3.0%
|
3.7%
|
6.5%
|
| __________________ | |
| (1) | Includes the Ps. 2,588 million current portion of long-term debt. |
| (2) | Excludes subordinated intercompany debt. |
Generally, the covenants contained in the credit facilities and other instruments governing our indebtedness entered into by our subholding companies include limitations on the incurrence of any additional debt based on debt service coverage ratios or leverage tests. The credit agreements entered into by our subholding companies or their subsidiaries also generally include restrictive covenants applicable to our subholding companies and their subsidiaries. There are no cross-guarantees between subholding companies, and we have not provided guarantees with respect to any of the debt obligations of our subholding companies.
The following is a summary of our indebtedness by subholding company:
- Coca-Cola FEMSA. As a result of the Panamco acquisition, Coca-Cola FEMSA's total indebtedness was Ps. 28,915 million, excluding Ps. 89 million of short
and long term notes payable, as of December 31, 2003, as compared to Ps.3,306 million as of December 31, 2002. Cash and cash equivalents were Ps.2,783 million as of December 31, 2003, as compared to Ps.6,429 million as
of December 31, 2002. Approximately US$43 million of cash is subject to restrictions as a result of certain collateral arrangements Coca-Cola FEMSA entered into on behalf of its subsidiaries with respect to existing
indebtedness.
As part of Coca-Cola FEMSA's financing policy, it expects to continue to finance its liquidity needs from cash from operations, although in the future it may be required to finance its working capital and capital expenditure needs with short-term debt or other borrowings. As a result of regulations in certain countries in which it operates, it may not be beneficial or, as in the case of exchange controls in Venezuela , practicable for Coca-Cola FEMSA to remit cash generated in local operations to fund cash 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, Coca-Cola FEMSA or its subsidiaries may decide, or be required, to fund cash requirements in these countries through local borrowings rather than remitting funds from another country.
As of December 31, 2003, Coca-Cola FEMSA had U.S. dollar-denominated, uncommitted approved lines of credit totaling approximately Ps.2,944 million, of which Ps.2,039 million was available as of such date. In December 2003, Coca-Cola FEMSA finalized a loan agreement with The Coca-Cola Company that permits it to borrow, upon the satisfaction of certain conditions, up to US$250 million prior to December 20, 2006 for funding working capital needs and for other general corporate purposes at any time when such funding is not otherwise available under existing lines of credit.Coca-Cola FEMSA's average cost of debt was 5.9% in U.S. dollars, 7.4% in Mexican pesos and 10.3% in Colombian pesos as of December 31, 2003 compared to 9.1% in U.S. dollars as of December 31, 2002
FEMSA Cerveza. As of December 31, 2003, FEMSA Cerveza's total outstanding debt was Ps. 5,662 million, which included Ps. 31 million of outstanding short-term trade and working capital loans. As of December 31, 2003, FEMSA Cerveza had approximately Ps. 5,631 million of long-term debt outstanding that included a Ps. 285 million medium-term revolving loan and Ps. 5,346 million consisting of bilateral loans and equipment financing loans. As of December 31, 2003, FEMSA Cerveza had U.S. dollar-denominated approved, uncommitted lines of credit totaling approximately Ps. 2,030 million, of which Ps. 1,999 million was available as of such date. FEMSA Cerveza's average cost of debt as of December 31, 2003 was 9.0% in Mexican pesos and 3.8% in U.S. dollars.
FEMSA Comercio. As of December 31, 2003, FEMSA Comercio's total outstanding debt was Ps. 1,534 million, which consisted of a Ps. 1,477 long-term syndicated loan denominated in U.S. dollars that matures in August 2006, and Ps. 57 million of U.S. dollar-denominated short-term debt that matures in June 2004. As of December 31, 2003, FEMSA Comercio had U.S. dollar-denominated approved, uncommitted lines of credit totaling Ps. 1,036 million, all of which was available as of such date. FEMSA Comercio's average cost of debt was 3.0% in U.S. dollars as of December 31, 2003 compared to 2.7% as of December 31, 2002.
-
FEMSA Empaques. As of December 31, 2003, FEMSA Empaques' total outstanding debt was Ps. 2,159 million, Ps. 682 million of which consisted of short-term trade and the remaining Ps. 1,477 million which consisted of long-term indebtedness. As of December 31, 2003, FEMSA Empaques' long-term debt obligations amounted to Ps. 567 million under long-term credit agreements incurred in connection with equipment financing transactions and/or government sponsored export-financing programs of the countries of origin of such equipment and Ps. 910 million of a long term syndicated loan maturing in December 2005. As of December 31, 2003, FEMSA Empaques had U.S. dollar-denominated approved, uncommitted lines of credit totaling Ps. 1,235 million, of which Ps. 554 million was available as of such date. FEMSA Empaques' average cost of debt was 3.7% as of December 31, 2003 compared to 2.9% as of December 31, 2002.
Contingencies
We have various loss contingencies, for which reserves have been recorded in those cases where we believe the results of an unfavorable resolution is probable. Most of these loss contingencies have been recorded as reserves against intangibles. Any amounts required to be paid in connection with these loss contingencies would be required to be paid from available cash.
Capital Expenditures
For the past four years, we have had significant capital expenditure programs, which for the most part were financed with cash from operations. Principal components of our capital expenditures have been for equipment, market-related investments and production capacity and distribution network expansion at Coca-Cola FEMSA and at FEMSA Cerveza; the construction of new Oxxo stores at FEMSA Comercio; and plant improvements at FEMSA Empaques.
Expected Capital Expenditures for 2004
Our capital expenditure budget for 2004 is expected to be approximately Ps. 9.7 billion. The following discussion is based on each of our subholding companies' internal 2004 budgets. The capital expenditure plan for 2004 is subject to change based on market and other conditions and the subsidiaries' results of operations and financial resources.
In connection with the continued integration of Coca-Cola FEMSA's new territories, it estimated that its capital expenditures in 2004 would be approximately of Ps. 3.3 billion. Coca-Cola FEMSA's capital expenditures in 2004 are primarily intended for:
- investments in returnable bottles and cases;
- market investments (primarily for the placement of refrigeration equipment); and
- integration of operations within our new territories, such as expenditures required to standardize our information systems, replace older distribution vehicles
and overhaul plant facilities and distribution centers; and improve our manufacturing facilities.
FEMSA Cerveza's capital expenditure budget for 2004 is expected to be approximately Ps. 4.7 billion. FEMSA Cerveza expects to allocate part of this budget for investments in its manufacturing facilities, predominantly related to marginal capacity expansions of its breweries and equipment modernization. FEMSA Cerveza also expects to apply a portion of this budget towards the improvement of its distribution assets, including new and replacement vehicles, towards the maintenance of a secondary distribution fleet and towards its ERP and information technology systems. In addition, FEMSA Cerveza plans to invest in commercial and market-related activities such as the enhancement of its retail coverage, to acquire third-party distributors, to develop long-term sponsorships and to place refrigeration equipment nationwide.
FEMSA Comercio's capital expenditure budget in 2004 is expected to total approximately Ps. 1.4 billion. The year 2004's budget will be allocated to the addition of new Oxxo stores and to a lesser extent to the refurbishing of the existing Oxxo stores. In addition, investments are planned in FEMSA Comercio's information technology and ERP software systems.
FEMSA Empaques' capital expenditure budget for 2004 is expected to be approximately Ps. 329 million to be allocated among its various product lines and facilities.
Hedging Activities
Our business activities require the holding or issuing of derivative instruments to hedge our exposure to market risks related to changes in interest rates, foreign currency exchange rates, equity risk and commodity price risk. See “Item 11. Quantitative and Qualitative Disclosures about Market Risk.”
The following table provides a summary of the fair value of derivative instruments as of December 31, 2003. The fair market value is obtained mainly from external sources, which are our counterparties to the contracts.
| Fair Value At December 31, 2003 (Millions of Constant Mexican pesos) |
|||||
| |
Maturity less than 1 year
|
Maturity 1 - 3 years |
Maturity 4 - 5 years |
Maturity in excess of 5 years
|
Total fair value |
| Prices quoted by external sources | (63) | (88) | (183) | - | (334) |
Plan for the Disposal of Certain Fixed Assets
We have identified certain fixed assets consisting of land, buildings and equipment for disposal, and we have an approved program for disposal of these fixed assets. These assets are not in use and have been valued at their estimated realizable value, according to independent appraisals. These assets are allocated as follows:
| December 31, (Millions of Mexican pesos) |
||
| 2003 | 2002 | |
| FEMSA Cerveza | Ps. 299 | Ps. 409 |
| FEMSA Empaques | 41 | 41 |
| FEMSA | 327 | 341 |
| Total | Ps. 667 | Ps. 791 |
Fixed assets recorded at their estimated realizable value are considered monetary assets on which a loss on monetary position is computed and recorded in the results of operation.
U.S. GAAP Reconciliation
The principal differences between Mexican GAAP and U.S. GAAP that affect our net majority income and majority shareholders' equity relate to the accounting treatment of the following items:
- deferred income taxes and deferred employee profit sharing;
- deferred promotional expenses;
- restatement of imported machinery and equipment;
- goodwill amortization;
- financial instruments; and
- capitalization of interest expense.
For a more detailed description of the differences between Mexican GAAP and U.S. GAAP as they relate to us and a reconciliation of net majority income and majority shareholders' equity under Mexican GAAP to net income and shareholders' equity under U.S. GAAP, see notes 25 and 26 to our consolidated financial statements.
Pursuant to Mexican GAAP, our consolidated financial statements recognize certain effects of inflation in accordance with Bulletin B-10 and B-12. These effects were not reversed in the reconciliation to U.S. GAAP.
Under U.S. GAAP, we had net income of Ps. 3.271 billion and Ps. 3.206 billion in 2003 and 2002, respectively. Under Mexican GAAP, we had net majority income of Ps. 3.093 billion and Ps. 2.947 billion in 2003 and 2002, respectively. In 2003, net income under U.S. GAAP was higher than net majority income under Mexican GAAP, mainly as a result of the effect of deferred income taxes, deferred employee profit sharing and financial instruments.
Shareholders' equity under U.S. GAAP as of December 31, 2003 and 2002 was Ps. 42.112 billion and Ps. 38.233 billion, respectively. Under Mexican GAAP, majority shareholders' equity as of December 31, 2003 and 2002 was Ps. 28.400 billion and Ps. 24.024 billion, respectively. The principal reasons for the difference between majority shareholders' equity under U.S. GAAP and Mexican GAAP were the effect of the goodwill generated by the minority interest acquisition and the restatement of imported machinery and equipment, partially offset by the effects of deferred income taxes and deferred employee profit sharing.
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
Directors
Management of our business is vested in the board of directors. Our bylaws provide that the board of directors will consist of at least sixteen directors and designated alternate directors elected by our shareholders at the annual ordinary general shareholders meeting. Directors are elected for a term of one year, although they remain in office until successors are appointed and replace them. Alternate directors are authorized to serve on the board of directors in place of directors who are unable to attend meetings and may participate in the activities of the board of directors. Nineteen members form our board of directors. Our bylaws provide that the holders of the Series B Shares elect at least eleven directors and that the holders of the Series D Shares elect five directors. The shareholders may designate alternate directors to cover the absences of a specific director. Upon the issuance of Series L Shares or upon the conversion of th e Series D-L Shares, the holders of the Series L Shares will be entitled to elect two directors. See “Item 10. Additional Information - Bylaws.”
The names and positions of the current members of the board of directors, their dates of birth and information on their principal business activities outside our company are outlined in the following table. In each case, the date presented as “First elected” corresponds to the earliest appointment to the board of directors of either FEMSA, Emprex or FEMSA's predecessor Valores Industriales, S.A. See “Item 4. Information on the Company--Corporate Background.”
BOARD OF DIRECTORS OF FEMSA
Series “B” DirectorsEugenio Garza Lagüera |
Born: |
December 1923 |
Director and Honorary |
First elected: |
1960 |
Life Chairman |
Term expires: |
2005 |
|
Other directorships: |
Honorary Life Chairman of Coca-Cola FEMSA, Instituto Tecnológico de Estudios Superiores de Monterrey (ITESM) and BBVA Bancomer |
|
Business experience: |
Joined FEMSA in 1946 in the research department of Cuauhtémoc |
|
Education: |
Holds degrees in chemical engineering from the University of Texas and in business administration from ITESM |
|
Alternate director: |
Mariana Garza de Treviño (1)(2) |
José Antonio Fernández (3) |
Born: |
February 1954 |
Director and Chairman of the Board |
First elected (Chairman): |
2001 |
|
First elected (Director): |
1984 |
|
Term expires: |
2005 |
|
Principal occupation: |
Chief Executive Officer of FEMSA |
|
Other directorships: |
Chairman of the Board of Coca-Cola FEMSA, Vice-Chairman of the Board of ITESM and Member of the Boards of BBVA Bancomer, Grupo Industrial Saltillo, S.A. de C.V., Industrias Peñoles, S.A. de C.V. and Grupo Industrial Bimbo, S.A. de C.V. (Grupo Bimbo) |
|
Business experience: |
Joined FEMSA's strategic planning department in 1987. Held managerial positions at FEMSA Cerveza's Commercial Division and Oxxo. Appointed our Chief Executive Officer in 1995 |
|
Education: |
Holds a degree in industrial engineering and an MBA from ITESM |
|
Alternate director: |
Federico Reyes |
Paulina Garza de Marroquín (1)(2) |
Born: |
March 1972 |
Director |
First elected: |
2004 |
|
Term expires: |
2005 |
|
Principal occupation: |
Private Investor |
|
Other directorships: |
Member of the Board of Trustees of Pronatura del Noreste, A.C. and Patronato de Chipinque, A.C. |
Business experience: |
Held a position in FEMSA Cerveza's marketing department in 1996 |
|
|
Education: |
Holds a business administration degree from ITESM |
|
Alternate director: |
Javier Fernández Carbajal (4) |
José Calderón |
Born: |
September 1931 |
Director |
First elected: |
1955 |
|
Term expires: |
2005 |
|
Principal occupation: |
Chairman of Franca Servicios, S.A. de C.V. |
|
Other directorships: |
Member of the Boards of BBVA Bancomer and Grupo Industrial Alfa, S.A. de C.V., (Grupo Alfa) |
|
Education: |
Holds a degree in business administration from ITESM |
|
Alternate director: |
José Calderón Rojas (5) |
Consuelo Garza de Garza (6) |
Born: |
October 1930 |
Director |
First elected: |
1995 |
|
Term expires: |
2005 |
|
Business experience: |
Founder and Former President of Asociación Nacional Pro-Superación Personal (a non-profit organization) |
|
Alternate director: |
Alfonso Garza Garza (7) |
Max Michel Suberville |
Born: |
July 1932 |
Director |
First elected: |
1985 |
|
Term expires: |
2005 |
|
Principal occupation: |
Honorary Chairman of the Board of El Puerto de Liverpool, S.A. de C.V. |
|
Other directorships: |
Member of the Boards of Grupo Lamosa, S.A. de C.V., Industrias Peñoles, S.A. de C.V., BBVA Bancomer and Grupo Nacional Provincial, S.A. |
|
Education: |
Holds a graduate degree from The Massachusetts Institute of Technology and completed post-graduate studies at Harvard University |
|
Alternate director: |
Max Michel González (8) |
Alberto Bailleres |
Born: |
August 1931 |
Director |
First elected: |
1995 |
|
Term expires: |
2005 |
|
Principal occupation: |
Executive President of Industrias Peñoles, S.A. de C.V., Grupo Nacional Provincial, S.A., and Grupo BAL, S.A. de C.V. |
|
Other directorships: |
Chairman of the Board of Industrias Peñoles, S.A. de C.V., Grupo Nacional Provincial, S.A. and Grupo Palacio de Hierro, S.A. de C.V. Member of the Boards of BBVA Bancomer and Valores Mexicanos Casa de Bolsa, S.A. de C.V. |
Education: |
Holds an economics degree from Instituto Tecnológio Autónomo de México |
|
Alternate director: |
Arturo Fernández |
|
Eduardo A. Elizondo |
Born: |
December 1922 |
Director |
First elected: |
1995 |
|
Term expires: |
2005 |
|
Principal occupation: |
Attorney at law |
|
Other directorships: |
Member of the Board of BBVA Bancomer, Chairman of the Regional Board of Advisors of Bancomer, S.A., and Grupo Industrial Ramirez, S.A. |
|
Business experience: |
Served as Treasurer General from 1961 to 1967 and Constitutional Governor from 1967 to 1971 for the State of Nuevo León. Acted as Chairman of the Board of Valores of Monterrey, S.A. de C.V. |
|
Education: |
Holds a law degree from the Universidad Autónoma de Nuevo León (UANL) |
|
Alternate director: |
Juan Guichard Michel (9) |
|
|
|
Ricardo Guajardo Touché |
Born: |
May 1948 |
Director |
First elected: |
1988 |
|
Term expires: |
2005 |
|
Principal occupation: |
Chairman of the Board of BBVA Bancomer |
|
Other directorships: |
Member of the Board of El Puerto de Liverpool, S.A. de C.V., Grupo Alfa, BBVA Bancomer, Grupo Aeroportuario del Sureste, S.A. de C.V. and ITESM |
Business experience: |
Has held senior executive positions in our company, Grupo AXA, S.A. de C.V. and Valores de Monterrey, S.A. de C.V. |
|
Education: |
Holds degrees in electrical engineering from ITESM and the University of Wisconsin and a masters degree from the University of California at Berkeley |
|
Alternate director: |
Eva Garza de Fernández (1)(10) |
|
Alfredo Livas |
Born: |
July 1951 |
Director and Secretary |
First elected: |
1995 |
|
Term expires: |
2005 |
|
Principal occupation: |
President of Praxis Financiera, S.C. |
|
Other directorships: |
Member of the Boards of Grupo Jomar, S.A. de C.V. and British American Tobacco (Mexican board) |
|
Business experience: |
Joined FEMSA in 1978 and held several positions in the areas of financial planning and treasury and served as Chief Financial Officer from 1989 to 1999 |
|
Education: |
Holds an economics degree from the UANL and an MBA and masters degree in economics from the University of Texas |
|
Alternate Director : |
José González Ornelas |
Roberto Servitje |
Born: |
January 1928 |
Director |
First elected: |
1995 |
|
Term expires: |
2005 |
|
Principal occupation: |
Chairman of the Board of Grupo Bimbo |
|
Other directorships: |
Member of the Board of DaimlerChrysler de México, S.A. |
|
Business experience: |
Founding Member and active Chairman of Grupo Bimbo |
|
Education: |
Holds a PMD degree from Harvard University |
|
Alternate director |
Alfredo Martínez Urdal |
Carlos Salguero |
Born: |
October 1929 |
Director |
First elected: |
1995 |
|
Term expires: |
2005 |
|
Business experience: |
Former Executive Vice President of Phillip Morris International |
|
Other directorships: |
Former Member of the Boards of Tabacalera Mexicana, S.A. de C.V., Tabacalera Costarricense, S.A., Tabacalera Centroamericana, S.A. and other Latin American companies |
|
Education: |
Holds a business degree from the Columbian Faculty of Economic Sciences, postgraduate studies in economics and management from Albany Business College and University College (Syracuse). Received an Honor for Civil Merit by H.M. the King of Spain in 1995 |
|
Alternate director: |
Eduardo Padilla Silva |
José Manuel Canal Hernando |
Born: |
February 1940 |
Director |
First elected: |
2003 |
|
Term expires: |
2005 |
|
Principal occupation: |
Private consultant |
|
Other directorships: |
Member of the Board of Coca-Cola FEMSA |
|
Business experience: |
Former managing partner at Ruiz, Urquiza y Cía, S.C., from 1981 to 1999. Acted as our statutory examiner from 1984 to 2002. Presided in the Committee of Surveillance of the Mexican Institute of Finance Executives and has participated in several commissions at the Mexican Association of Public Accountants. Extensive experience in financial auditing for holding companies, banks and financial brokers |
|
Education: |
Holds a CPA degree from the Universidad Nacional Autónoma de México |
|
Alternate director: |
Othón Páez Garza (11) |
Bárbara Garza Gonda (1)(2) |
Born: |
December 1959 |
Director |
First elected: |
2002 |
|
Term expires: |
2005 |
|
Principal occupation: |
Vice President of Fundación Cultural Bancomer |
|
Other directorships: |
Alternate Director of Coca-Cola FEMSA. |
|
Business experience: |
Has worked in BBVA Bancomer, Citibank and Banca Serfin |
|
Education: |
Holds a degree in business administration and an MBA from ITESM |
|
Alternate director: |
Carlos Salazar Lomelín |
Series “D” Directors |
|
|
Alexis E. Rovzar |
Born: |
July 1951 |
Director |
First elected: |
1989 |
|
Term expires: |
2005 |
|
Principal occupation: |
Executive Partner at White & Case, S.C. law firm |
|
Other directorships: |
Member of the Boards of Coca-Cola FEMSA, Grupo Bimbo, Deutsche Bank (Mexico), Grupo ACIR, S.A. de C.V. and COMEX, S.A. de C.V. |
|
Business experience: |
Expert in private and public mergers and acquisitions as well as other aspects of financial law and has been advisor to many companies on international business and joint venture transactions |
|
Education: |
Holds a law degree from the Universidad Nacional Autónoma de México |
|
Alternate director: |
Lorenzo Garza Hinojosa |
Luis Téllez |
Born: |
October 1958 |
Director |
First elected: |
2001 |
|
Term expires: |
2005 |
|
Principal Occupation: |
Managing Director of The Carlyle Group, S. de R.L. de C.V., a finance consulting firm |
|
Other directorships: |
Member of the Boards of Grupo Desc, S.A. de C.V., Grupo México, S.A. de C.V. and Casa de Cambio Monex, S.A. de C.V., Cablevisión, S.A. de C.V. and Daimler Chrysler de México, S.A. de C.V. |
|
Business experience: |
Former Executive Vice-President of Grupo Desc, S.A. de C.V. Served as Secretary of Energy of Mexico from 1997 to 2000 and Chief of Staff of the President of Mexico from 1996 to 1997 |
|
Education: |
Holds an economics degree from Instituto Tecnológico Autónomo de México and a Ph.D. in Economics from The Massachusetts Institute of Technology |
|
Alternate director: |
Armando Garza Sada |
Helmut Paul |
Born: |
March 1940 |
Director |
First elected: |
1988 |
|
Term expires: |
2005 |
|
Principal occupation: |
Owner of H. Paul & Company LLC, a corporate finance advisory firm and Senior Consultant of International Finance Corporation |
Other directorships: |
Member of the Boards of Scudder Fund for Independent Power Generation (management committee), HSBC Private Equity Fund (Argentina/Brazil) and Zurich Emerging Markets Solutions |
|
|
Business experience: |
Has held several managing positions in the International Finance Corporation, mainly responsible for Latin American and Caribbean investments |
|
Education: |
Holds an MBA from the University of Hamburg |
|
Alternate director: |
Antonio Elosua Muguerza |
Lorenzo H. Zambrano |
Born: |
March 1944 |
Director |
First elected: |
1995 |
|
Term expires: |
2005 |
|
Principal occupation: |
Chairman and Chief Executive Officer of Cemex, S.A. de C.V. |
|
Other directorships: |
Member of the Boards of Alfa, S.A. de C.V. (Human Resources Committee), Vitro, S.A. de C.V. (Chairman of the Compensations Committee), Televisa, S.A. de C.V., and Grupo Financiero Banamex, S.A. de C.V. Member of Citigroup's International Advisory Board and Member of the Advisory Committee of Capital International, Inc. |
|
Education: |
Holds a degree in mechanical engineering and administration from ITESM and an MBA from Stanford University |
|
Alternate director: |
Francisco Garza Zambrano |
Robert E. Denham |
Born: |
August 1945 |
Director |
First elected: |
2001 |
|
Term expires: |
2005 |
|
Principal occupation: |
Partner of Munger, Tolles & Olson LLP law firm |
|
Other directorships: |
Member of the Boards of Wesco Financial Corporation, US Trust Company, and Lucent Technologies, Inc. |
|
Business experience: |
Former Chief Executive Officer of Salomon Inc., Representative to the APEC Business Advisory Council, Member of the OECD Business Sector Advisory Group on Corporate Governance |
|
Education: |
Magna cum laude graduate from the University of Texas, holds a JD from Harvard Law School and a masters degree in Government from Harvard University |
|
Alternate director: |
Sergio Deschamps Ebergenyi |
(1) Daughter of Eugenio Garza Lagüera.
(2) Sister-in-law of José Antonio Fernández.
(3) Son-in-law of Eugenio Garza Lagüera.
(4) Brother of José Antonio Fernández Carbajal.
(5) Son of José Calderón Senior.
(6) Sister of Eugenio Garza Lagüera.
(7) Son of Consuelo Garza de Garza.
(8) Son of Max Michel Suberville.
(9) Nephew of Max Michel Suberville.
(10) Wife of José Antonio Fernández.
(11) Cousin of Eugenio Garza Lagüera.
Statutory Examiner
Under Mexican law, a statutory examiner must be elected by the shareholders at the annual ordinary general shareholders' meeting for a term of one year. At our subsequent annual ordinary general shareholders' meeting, the statutory examiner is required to review the affairs of the company and report as to the accuracy of the financial information presented to shareholders by the board of directors. The statutory examiner is also authorized:
to call ordinary or extraordinary general shareholders' meetings;
to place items on the agenda for general shareholders' meetings and meetings of the board of directors; and
to attend general shareholders' meetings and meetings of the board of directors (without the right to vote).
The statutory examiner also receives periodic reports from the board of directors regarding material aspects of our affairs and financial condition. Our current statutory examiner is Ernesto González Dávila and the current alternate statutory examiner is Ernesto Cruz Velázquez de León.
Senior Management
The names and positions of our current senior management and that of our principal subholding companies, their dates of birth and information on their principal business activities outside of FEMSA are as follows:
Executive Officers
FEMSA |
|
|
José Antonio Fernández |
|
|
|
Joined FEMSA: |
1987 |
|
|
|
Alfredo Martínez Urdal
|
Born: |
September 1931 |
| Business experience within FEMSA: | Former Chief Executive Officer of FEMSA Cerveza and Coca-Cola FEMSA |
|
| Other business experience: | Holds an economics degree from the Western Reserve University, a law degree from the Universidad Nacional Autónoma de
México and a post-graduate degree from Harvard Business School. Has served as Chief Executive Officer of many prominent Mexican companies and banks, including Ponderosa Industrial Accel, Grupo Chihuahua,
Multibanco Comermex, Celulosa de Chihuahua and Banco Comercial Mexicano |
|
Federico Reyes |
Born: |
September 1945 |
| Business experience within FEMSA: | Director of Corporate Development, 1992 |
|
| Other business experience: | Holds a degree in business and finance from ITESM. Has worked as Director of Corporate Staff at Grupo AXA and has extensive
experience in the insurance sector, working eight years in Valores de Monterrey, S.A. de C.V., six of them as Chief Executive Officer |
|
José González Ornelas |
Born: |
April 1951 |
| Business experience within FEMSA: | Has held several managerial positions in FEMSA including Chief Financial Officer of FEMSA Cerveza, Director of Planning and
Corporate Development of FEMSA and Chief Executive Officer of FEMSA Logística |
|
| Other business experience: | Holds a CPA degree from the UANL and has post-graduate studies in business administration from the Instituto Panamericano de
Alta Dirección de Empresa (IPADE) |
|
Ricardo González Sada |
Born: |
August 1955 |
| Business experience within FEMSA: | Vice President of Strategic Planning. Held managerial positions in the human resources department of FEMSA from 1977 to 1978
|
|
| Other business experience: | Holds a degree in industrial and systems engineering from ITESM and an MBA from IESE, Barcelona. Had a 20-year career in
Grupo Vitro, three of them as Chairman and Chief Executive Officer of Vidrio Plano, S.A. de C.V. |
|
Carlos Aldrete |
Born: |
August 1956 |
| Business experience within FEMSA: | Extensive experience in international business and financial transactions, debt issuances and corporate restructurings.
Expertise in securities and private mergers and acquisitions law |
|
| Other business experience: | Holds a law degree from the UANL and a masters degree in Comparative Law from the College of Law of the University of
Illinois |
|
Rosa María Hinojosa Martínez |
Born: |
February 1962 |
| Other business experience: | Holds a CPA degree from ITESM, completed post-graduate studies at IPADE and has participated in several post-graduate
programs in business administration |
|
FEMSA Cerveza |
|
|
Javier Astaburuaga Sanjines |
Born: |
July 1959 |
| Business experience within FEMSA: | Joined FEMSA as a financial information analyst and later acquired experience in corporate development, administrative and
finance. Between 1993 and 2001, held various senior positions at FEMSA Cerveza, including Chief Financial Officer. For two years prior to his current position, was FEMSA Cerveza's Director of Sales for the north region
of Mexico. |
|
Jorge Luis Ramos |
Born: |
December 1952 |
| Business experience within FEMSA: | Director of Human Resources of FEMSA Cerveza from 1996 until 2000; Director of Sales, South Market from 2000 until his
appointment to his current position |
|
Gerardo Estrada Attolini |
Born: |
May 1957 |
| Business experience within FEMSA: | Chief Financial Officer of FEMSA from 2000 until 2002; Administrative Director of FEMSA Cerveza from 2002 until his
appointment to his current position |
|
| Other business experience: | Holds CPA and MBA degrees from ITESM |
|
Coca-Cola FEMSA |
|
|
Carlos Salazar |
Born: |
April 1951 |
| Business experience within FEMSA: | Has held managerial positions in several subsidiaries of FEMSA, including Grafo Regia and PTM. Served as Chief Executive
Officer of FEMSA Cerveza where he also held various management positions in the Commercial Planning and Export divisions |
|
| Other business experience: | Bachelor's degree in economics from ITESM, postgraduate studies in business administration and in economic development in
Italy |
|
Héctor Treviño Gutiérrez |
Born: |
August 1956 |
| Business experience within FEMSA: | Has held managerial positions in the international financing, financial planning, strategic planning and corporate
development areas of FEMSA |
|
| Other business experience: | Holds a degree in chemical engineering from ITESM and an MBA from the Wharton Business School |
|
FEMSA Comercio |
|
|
Eduardo Padilla Silva |
Born: |
January 1955 |
| Business experience within FEMSA: | Director of Planning and Control of FEMSA from 1997 to 2000; Chief Executive Officer Strategic Business Division from 2000
until his current position |
|
| Other business experience: | Had a 20-year career in Grupo Alfa, culminating with a ten-year tenure as Chief Executive Officer of Terza, S.A. de C.V. His
major areas of expertise are operational control, strategic planning and financial restructuring |
|
| Education: | Holds a degree in mechanical engineering from ITESM and an MBA from Cornell University |
|
| Strategic Procurement (FEMSA Empaques) | ||
Sergio Sáenz |
Born: |
September 1950 |
| Directorships: | Chairman of the Board of FEMSA Cerveza |
|
| Business experience within FEMSA: | Chief Financial Officer of FEMSA Cerveza |
|
| Other business experience: | Had a 13-year career in Cuprum, S.A. de C.V., culminating as Chief Executive Officer. Holds a chemical engineering degree
from the UANL and an MBA from the University of Texas at Austin |
|
Alfonso Garza Garza |
Born: |
July 1962 |
| Other directorships: | Member of the board Coca-Cola FEMSA, and Hospital San José Tec de Monterrey |
|
| Business experience within FEMSA: | Has experience in several FEMSA business units and departments, including Domestic Sales, International Sales, Procurement
and Marketing, mainly in CCM and FEMSA Empaques |
|
| Other business experience: | Holds a degree in Industrial Engineering from the ITESM and an MBA from IPADE |
Compensation of Directors and Senior Management
For the year ended December 31, 2003, the aggregate compensation paid to our directors was approximately Ps. 4.2 million.
For the year ended December 31, 2003, the aggregate compensation paid to executive officers and senior management of FEMSA and its subsidiaries was approximately Ps. 806 million. Aggregate compensation includes bonuses we paid to certain members of senior management and payments in connection with the Stock Incentive Plan described below. Our senior management and executive officers participate in our benefit plan and post-retirement medical services plan on the same basis as our other employees. Members of our board of directors do not participate in our benefit plan and post-retirement medical services plan, unless they are retired employees of our company. As of December 31, 2003, amounts set aside or accrued for all employees under these retirement plans were Ps. 3,512 million, of which Ps. 1,697 million is already funded.
Stock Incentive Plan
From 1998 until 2003, we, along with our subsidiaries, had a five-year stock incentive plan for the benefit of our executive officers, which we refer to as the Stock Incentive Plan. Under the terms of the Stock Incentive Plan, during the years 1999 through 2003, our executive officers may have been selected to receive a special cash bonus, which will be used to obtain a stock grant. Each year, our Chief Executive Officer, together with the chief executive officers of the subholding companies, selected the executive officers who may have participated in the Stock Incentive Plan and determined the amount of the special bonus, based on each executive officer's level of responsibility and corporate achievements during the prior year.
The stock grants were administrated by certain trusts for the benefit of the selected executive officers. Every year a new administrative trust was formed to manage the stock grants acquired in that particular year. Under the terms of the Stock Incentive Plan, each time a special bonus was assigned to an executive officer, the executive officer contributed the special bonus received to the administrative trust in exchange for a stock grant, as determined annually by us. Each administrative trust is managed by a technical committee formed by executives of our company and is governed by Mexican law.
A stock grant entitles an executive officer to receive BD Units or, in the case of officers of Coca-Cola FEMSA, a specified proportion of BD Units and Series L Shares of Coca-Cola FEMSA, which will be acquired by the respective administrative trust in the open market, using the special bonus contributed by each executive officer. Under the terms of the Stock Incentive Plan, the ownership of the BD Units and, in its case, the Series L Shares of Coca-Cola FEMSA, will vest upon the executive officer holding a stock grant each 28 th of February over the next five years following the date of receipt of the stock grant, at a rate per year equivalent to the number of BD Units and, as applicable, Coca-Cola FEMSA Series L Shares, which can be acquired with 20% of such stock grant.
As of the date of this annual report, five administrative trusts, which administer the Stock Incentive Plan, hold a total of 4,131,501 BD Units and 1,133,926 Series L Shares of Coca-Cola FEMSA, each representing 0.389% and 0.061% of the total number of shares outstanding of FEMSA and of Coca-Cola FEMSA, respectively.
EVA-Based Stock Incentive Plan
Beginning in 2004, we, along with our subsidiaries, plan to commence a new three-year stock incentive plan for the benefit of our executive officers, which we refer to as the EVA Stock Incentive Plan. This new plan replaces the Stock Incentive Plan described above and is being developed using as the main metric for evaluation the Economic Value Added or EVA framework developed by Stern Stewart & Co., a compensation consulting firm. Under the proposed terms of the EVA Stock Incentive Plan, eligible executive officers will be entitled to receive a special cash bonus, which will be used to purchase a stock grant in the Mexican stock exchange.
Based on the current proposed structure for the plan, each year, our Chief Executive Officer in conjunction with our Evaluation and Compensation Committee together with the chief executive officer of the respective subholding company, will determine the amount of the special cash bonus used to purchase the stock grant. This amount will be determined based on each executive officer's level of responsibility and based on the EVA generated by us.
We intend for the stock grants to be administrated by certain trusts for the benefit of the selected executive officers in the same manner as in the previous Stock Incentive Plan. Under the proposed terms of the EVA Stock Incentive Plan, each time a special bonus is assigned to an executive officer, the executive officer will contribute the special bonus received to the administrative trust in exchange for a stock grant. Pursuant to the proposed plan, the administrative trust will acquire BD Units of FEMSA or, in the case of officers of Coca-Cola FEMSA, a specified proportion of BD Units of FEMSA and Series L Shares of Coca-Cola FEMSA in the open market using the special bonus contributed by each executive officer. The ownership of the BD Units of FEMSA and, in the case of Coca-Cola FEMSA executives, the Series L Shares of Coca-Cola FEMSA will vest upon the executive officer holding a stock grant each year over the next five years followi ng the date of receipt of the stock grant, at a rate per year equivalent to 20% of the number of BD Units of FEMSA and Series L Shares of Coca-Cola FEMSA, as applicable.
Share Ownership
Several of our directors are participants to a voting trust. Each of the trust participants of the voting trust is deemed to have beneficial ownership with shared voting power over the shares deposited in the voting trust, which consist of 1,907,373,675 Series B Shares representing 69.67% of the Series B Shares outstanding as of March 15, 2004. See “Item 7. Major Shareholders and Related Party Transactions.”
The following table shows the Series B Shares, Series D-B Shares and Series D-L Shares as of March 15, 2004 beneficially owned by our directors who are trust participants of the voting trust, other than the shares deposited in the Voting Trust:
|
Series B |
Series D-B |
Series D-L |
|||
Beneficial Owner |
Shares |
Percent of Class |
Shares |
Percent of Class |
Shares |
Percent of Class |
Eugenio Garza Lagüera |
4,440,868 |
0.16% |
8,881,736 |
0.69% |
8,881,736 |
0.69% |
José Calderón Ayala |
2,276,517 |
0.08 |
4,553,034 |
0.36 |
4,553,034 |
0.36 |
Consuelo Garza de Garza |
20,821,980 |
0.40 |
4,031,160 |
0.31 |
4,031,160 |
0.31 |
Max Michel Suberville |
55,270,870 |
2.02 |
0 |
0.00 |
0 |
0.00 |
Alberto Bailleres |
333,890 |
0.01 |
667,780 |
0.05 |
667,780 |
0.05 |
Bárbara Garza Gonda |
0 |
0.00 |
0 |
0.00 |
0 |
0.00 |
Paulina Garza Gonda |
0 |
0.00 |
0 |
0.00 |
0 |
0.00 |
To our knowledge, no other director or officer is the beneficial owner of more than 1% of any class of our capital stock.
Board Practices
Our bylaws state that the board of directors will meet at least once every three months following the end of each quarter to discuss our operating results and the advancement in the achievement of strategic objectives. Our board of directors can also hold extraordinary meetings. See “Item 10. Additional Information - Bylaws.”
Under our bylaws, directors serve one-year terms although they continue in office if and until successors are appointed. None of our directors or senior managers of our subsidiaries has service contracts providing for benefits upon termination of employment.
Our board of directors is supported by committees, which are working groups that analyze issues and provide recommendations to the board of directors regarding their respective areas of focus. The executive officers interact periodically with the committees to address management issues. The following are the three committees of the board of directors:
The Evaluation and Compensation (Human Resources) Committee . Responsibilities include (i) recommending procedures for the election of the Chief Executive Officer and other senior executives; (ii) proposing to the board of directors the criteria for the evaluation of the Chief Executive Officer and other senior executives; and (iii) analyzing and presenting to the board of directors the proposal prepared by the Chief Executive Officer regarding the structure and amount of compensation for FEMSA's key executives. The current Evaluation and Compensation Committee members are: Lorenzo H. Zambrano (chairman), Roberto Servitje , Max Michel Suberville , Arturo Fernández Pérez and Carlos Salguero . Ricardo González Sada is the appointed secretary of this committee.
The Audit Committee . Responsibilities include (i) recommending to the board of directors the candidates for external auditors of FEMSA; (ii) ensuring the independence and objectivity of the latter; and (iii) recommending to the board of directors procedures for the preparation of financial information. The current Audit Committee members are: Alexis Rovzar (chairman), José Manuel Canal Hernando, Eduardo A. Elizondo and Helmut Paul. José González Ornelas is the appointed secretary of the Audit Committee.
The Finance and Planning Committee . Responsibilities include (i) evaluating the investment and financing policies proposed by the Chief Executive Officer; (ii) furnishing an opinion on the soundness of the annual budget and ensuring the implementation of the budget and any proposed strategic plan; and (iii) identifying risk factors to which the corporation is exposed, as well as evaluating its management policies. The current , Finance and Planning Committee members are: Ricardo Guajardo Touché (chairman), Alfredo Livas, Luis Téllez, Robert Denham and Javier Fernández Carbajal. Federico Reyes is the appointed secretary of this committee.
Employees
The table below sets forth the number of our employees for the years ended December 31, 2003, 2002 and 2001:
|
Employees of FEMSA for the Years Ended December 31, |
|||||||
|
2003 |
2002 |
2001 |
|||||
|
Non-Union |
Union Employees |
Total Employees |
Non-Union |
Union |
Non-Union |
Union |
|
Subholding Company |
|
|
|
|
|
|
|
|
Coca-ColaFEMSA (1) |
32,499 |
|||||||