Coca-Cola: Teaching the whole world to sing in perfect harmony has crowned this soft-drink giant king.

For decades now, when it comes to refreshment, Coca-Cola has been more of a staple than water in Mexico, and that helps local bottlers and distributors stay ahead of economic downturns. For the same reason, the beverage industry as a whole suffered less than other areas of the economy in Mexico during the 2001 downturn.

And in Mexico's beverage industry Coca-Cola Femsa is a standout. Analysts say that the company, jointly owned by the Coca-Cola Co. and Mexico's Femsa conglomerate, makes the utmost use of technology and modern marketing techniques, by working closely with Coca-Cola Co. headquarters in Atlanta, to continue growing even while other distributors succumb to the effects of the weak economy.

Coca-Cola Femsa "has grown at higher rates than the whole Coke system," says Yvonne Ochoa, a beverage analyst at BBVA Bancomer. "Every quarter they have this amazing increase in operating margin which is just out of this world, and you think, where can they go from here? There's no way they can do more. And then they do."

That operating margin in Mexico increased by 23.2% in the fourth quarter of 2000, and then by 26.2% in the fourth quarter of 2001, according to the latest company reports, issued Feb. 19. For the year, Coca-Cola Femsa increased its operating margin from 21% in 2000 to 25.2% in 2001. The company even managed to hold its own in Argentina enough to increase consolidated operating margins from 18% in 2000 to 21.7% in 2001.

Coca-Cola Femsa is 51% owned by the conglomerate Fomento Economico Mexicano S.A. de C.V. (FEMSA) and 30% by a wholly-owned subsidiary of the Coca-Cola Co.--the remaining 19% is publicly traded. The company bottles and distributes Coca-Cola trademark products in Mexico City and surrounding areas, Oaxaca, Tabasco, Chiapas and some parts of Veracruz. Coca-Cola Femsa accounts for 24% of the Coca-Cola Co.'s Mexico sales, according to its 2000 annual report. Its shares are traded on the Bolsa Mexicana de Valores (BMV) under the symbol KOFL and on the New York Stock Exchange as KOF. It is the largest of Mexico's 17 Coca-Cola bottlers, although that number is about to change as three of the others merge, according to industry sources.

Besides the biggies, are numerous small, independent Coke bottlers, each company operating under its own franchise in a proscribed territory. The route to territory expansion is through acquiring new franchises. Despite the small size of its territory, Coca-Cola Femsa is logging its sixth consecutive year of growth, the company says. Part of it is luck, analysts say--although its Mexico City domain is small, the area is densely populated--but the company also uses its resources and know how to the max.

"They've got it all mapped out," says Ochoa.

SECRET INGREDIENT

Coca-Cola Femsa investor relations manager Alfredo Fernandez credits a combination of strategies with carrying the company through the 2001 downturn: the successful launch of new products and flavors, efficient use of technology and sound fiscal management.

"In the end, the whole story is based on new product and presentation development, channel marketing and revenue-management strategies, as well as cost-cutting initiatives," says Fernandez.

For instance, in Mexico last summer the company introduced a 250-milliliter bottle for Coke's apple soda, Lift, and orange-flavored Fanta, as well as a new, eight-ounce, non-returnable glass bottle for Coke itself. Powerade, the Coca-Cola Co.'s trademark sports drink, had its debut in Mexico City in September, coming in a non-returnable bottle with sport cap, the bottler said. Along with other new items introduced previously, "those new presentations and new products have been fostering growth this year," Fernandez says.

Coke also has been expanding its reach through such acquisitions as the bottling and distribution rights to Mundet, which makes the popular Sidral brand sodas, announced in November. In addition, Fernandez says, "we have been trying strategies to increase per-capita consumption."

This includes a cooler-placement program, implemented after market research showed that a person buying a cold beverage is likely to drink it right away and then buy more.

Feeding into that is Coca-Cola Femsa's use of technology: Fernandez says the company gives its salespeople handheld computers. The salespeople travel to the network's 275,200 retailers--mostly mom-and-pop stores--then take an order, and input it on the spot, enabling more efficient distribution and inventory control.

"We can download the information everyday," says Fernandez. "And we have enough information to understand our clients and our customers. That's why we have been very successful in implementing new production-presentation launches."

TAKING THE CHALLENGE

Financially, the company has closed distribution centers and reduced overhead staff in some areas and "will continue the cost-cutting initiative," Fernandez says.

But, Coca-Cola Femsa and other beverage makers have one less thing to worry about this year. A 20% excise tax that had been proposed on all soft drinks was not put through. Instead, the government limited the tax to drinks made with high-fructose corn syrup (HFCS), so Coke merely switched.

"Now we're going to try to use 50/50 refined sugar and standard sugar," says Fernandez.

Last year, he says, Coca-Cola Femsa used 60% HFCS and 40% standard sugar.

"At the beginning of this year, we converted our Mexican bottling facilities to sugar cane-based production," Fernandez says. "As a result, the Mexican government's recently-imposed excise tax on carbonated soft drinks sweetened with high fructose corn syrup should not significantly affect our profitability."

Thus, it won't change the price, Fernandez adds. Although the cost of sugar has risen slightly--by 5% to 10%--that will only add 1% or 2% to the price of producing a finished bottle of Coke.

"That is substantially lower than (the proposed) 20% excise tax," Fernandez points out. He adds that although Coca-Cola Femsa plans to raise prices slightly this year, it is because they haven't been raised in 13 months, not because of the small increase in production cost.

The change in recipe will not change the taste either, he says. "The water of the geographic region has more of an impact on the flavor of the soft drink than the sweetener does."

Adriano Seabra, a vice president of Credit Suisse First Boston in Mexico City, says the sugar move has a minimal impact on Mexico's beverage industry, including Coke. "It's pretty easy, actually. Nobody's going to use anything but sugar. Nobody wants to pay 20%," Seabra says.

While Coke's longstanding presence helps keep it on the throne--it is so entrenched that there are even tales of tourists brushing their teeth with it decades ago when bottled water was not widely available--major rivals such as Pepsi are making inroads. So heated is the competition that Coke and Pepsi no longer release information on market share.

But Beverage Digest, a biweekly trade publication for the global beverage industry, has calculated that in Mexico, Coke has 70% of the market and Pepsi 16.5%. The rest is eaten up by local brands.

"Coke has a huge lead, but it's a competitive market," says editor John Sicher. "Pepsi's share is significant, and it's a market that's very important to both companies, and they focus a great deal of attention to it."

So much so that Pepsi has joined with other bottlers to file an antitrust complaint against Coke with the Mexican government's Federal Competition Commission. Pepsi thinks that Coke has led not so much because it's better, but because of what Pepsi and its fellow complainants allege to be unfair trade practices.

"They'd be a great competitor if they played by the rules," says Charles Nicolas, public relations director for PepsiCo International.

Coke denies the allegations. "Coca-Cola does not engage in antitrust practices," says Fernandez.

The commission has yet to rule. But with Coke so ubiquitous and the distribution system based on mom-and-pop stores rather than large chains, Coca-Cola Femsa is in little danger from competitors, analysts say.

Theresa Braine is a Merida-based freelance writer.