Soft Drinks Value and Volume Growth in Mexico and Implications for Developing Markets

Euromonitor International 06 January 2012

In Mexico soft drinks has been particularly successful at growing value between 2005 and 2010. Soft drinks volume also had substantial growth but was outpaced by value. The reasons for value growth outpacing volume growth in Mexico may have implications for other markets where the soft drinks category is still evolving; particularly true of developing markets with relatively low per capita soft drinks consumption.

MEXICO HAS STELLAR VALUE PERFORMANCE

From 2005 to 2010 on a global basis soft drinks off-trade volume growth (including concentrates on a reconstituted basis) was 24% and value growth was 15% (all currencies in constant US$ based on a fixed 2010 exchange rate). In Mexico over the same time period off-trade soft drinks volume has grown by 32% while value, on a constant currency basis, has grown by 57%. While volume in Mexico had a more favourable trend than the global average, value growth was particularly successful. There are several factors which can cause this dynamic. One alternative is that supply chain cost input inflation for soft drinks in Mexico could exceed the general inflation rate. Another possibility is that a relatively high value category, that is, a category with a relatively high unit price, could be responsible for the majority of volume growth. A third possibility could be that manufacturers were able to increase prices in excess of inflation and continue to have volume growth; in other words create value in consumers' minds for their brands. Let's take a look at each of these possibilities.

THE SUPPLY CHAIN INFLATION PICTURE

To examine supply chain cost inflation in Mexico, we can look at other categories that Euromonitor tracks as well as the increase in the cost of sugar. Euromonitor tracks the full range of beverages that people consume (except tap water). We will focus on nonalcoholic beverages including hot drinks as well as drinking dairy products (both milk and sour milk drinks such as drinking yogurt). For hot drinks in Mexico over the past five years, volume increased by 10% while value, on a constant currency basis, increased by only 5%. All of the dairy based categories demonstrated a similar pattern between volume and value growth; drinking milk volume +5% and value +4%, sour milk drinks/drinking yogurt volume +19% and value +14%. In all of these cases the volume growth rate exceeded the value growth rate. Increases in the cost of sugar could explain some, but not all, of soft drinks cost increases. Based on Euromonitor data, the cost to the Mexican consumer of a kilogram of sugar increased by 12% over the past five years, on a constant currency basis (compared to 57% value increase for total soft drinks). So it looks like food inflation exceeding the general inflation rate is, at best, only a partial explanation of the reason for the soft drinks value growth rate exceeding the volume growth rate.

HIGH VALUE SOFT DRINKS CATEGORY GROWTH

While it is possible for a high value category to contribute a disproportionate amount of volume growth, this did not happen in Mexico. From 2005 to 2010, over three in four litres of volume growth was contributed by bottled water and concentrates. 53% of soft drinks growth was contributed by bottled water and 24% by concentrates. The unit price of these categories was lower than the soft drinks average in both 2005 and 2010. In 2005 the average unit price for all soft drinks was Mx$5.6 per litre; for bottled water it was Mx$2.6 and concentrates Mx$2.8 (all currency amounts stated in constant 2010 Mx$). In 2010 the pattern remained the same; soft drinks Mx$6.7, bottled water Mx$3.2 and concentrates Mx$2.9. To examine the contribution of manufacturers ability to add value (as demonstrated by higher unit prices), we can look at the volume and value shares of the leading soft drinks manufacturers in Mexico. Value shares tell a very different story from volume shares. The off-trade volume shares in 2010 of the top three companies account for just over 60% of the soft drinks category (Coca-Cola 32%, Danone 16% and PepsiCo 13%). These same three companies account for 70% of the value share in 2010. However, in 2010 Coca-Cola has a much stronger value share, with 48% of soft drinks value while Danone drops to only 8%. PepsiCo maintains a 15% value share. Danone's value share declines relative to its volume share because it only participates in the relatively low price bottled water category. While the majority of Coca-Cola's business is in the relatively high price carbonates category (carbonates average unit price was Mx$12 per litre in 2010). However, this only tells half the story.

COCA-COLA SUCCESSFULLY ENHANCES VALUE PERCEPTIONS

The other half of the story is the success of carbonates in adding value in consumers' minds. The Carbonates category was able to increase prices faster than other soft drinks categories. In 2005 carbonates unit price was Mx$8.9 per litre while in 2010 it increased to Mx$12.0, a 35% increase in unit price (on a constant 2010 basis). This outpaced the change in the average unit price for all soft drinks (20% increase for soft drinks).

Coca-Cola was the manufacturer primarily responsible for adding value to the carbonates category. It had a 67% off-trade volume share and a 73% value share in 2010.

IMPLICATIONS FOR MIDDLE EAST/AFRICA

The ability to add value to the carbonates category may have important longer-term implications for smaller manufacturers in developing soft drinks in the Middle East/Africa region. This region has the lowest per capita volume for soft drinks. Coca-Cola and PepsiCo are rapidly penetrating this region with an 80% off-trade volume share of carbonates between them in 2010. If a smaller manufacturer is able to gain a toe-hold now, as carbonates adds value in the future, early investments may yield long-term benefits. For further insight, please contact Rick Haffner, Head of Beverages Research: Richard.haffner@euromonitorintl.com