Consumer Focus

Consumer-driven innovation is key to our business strategy. Through transformative innovation, we ensure our ability to serve and satisfy the evolving needs of our more than 351 million consumers across 10 different countries each and every day.

Together with our partner The Coca-Cola Company, in 2014, we introduced a number of new products and presentations to address our consumers’ needs more closely. After last year’s kickoff in Buenos Aires, Argentina, we successfully launched Coca-Cola Life across our Mexican operations this year. Sweetened with natural ingredients such as stevia and cane sugar, Coca-Cola Life offers our consumers a reduced calorie alternative for one of the world’s most beloved brands. Rolled out in five different presentations—including our new 235-ml lean can—this refreshing new product not only achieved more than 70% point-of-sale coverage, but also helped us to gain share and revitalize the Coca-Cola category among our consumers.

We also continued to satisfy and stimulate demand among our consumers for our growing portfolio of low-calorie, affordable sparkling beverages. Complementing the positive appeal of Coca-Cola Zero, Sprite Zero, and Sidral Mundet Light, we launched Fanta Zero and Fresca Zero throughout Mexico at attractive price points at the beginning of the year. Thanks to these initiatives, we significantly increased the coverage and volume of these zero-calorie beverages throughout the country.

Importantly, we continued to proactively serve our cost-conscious consumers with a growing array of affordable, returnable packaging alternatives. In Brazil, we considerably expanded the coverage of our 2-liter multi-serve returnable PET presentation for brand Coca-Cola, enabling more consumers to share the magic of Coke at home. In the Valley of Mexico, we significantly increased the volume of our 3.0-liter multi-serve returnable PET presentation for brand Coca-Cola, enhancing an attractive value proposition for our consumers’ enjoyment, while we reinforced our 2.5-liter multi-serve returnable PET presentation for Coca-Cola across the rest of our territories, expanding the opportunities to share this popular brand. In Mexico, we further broadened the coverage of our affordable, convenient 500-ml returnable glass presentation for brand Coca-Cola, fostering consumption at the point of sale or at home. In this key market, we also grew the coverage of our 1.25-liter multi-serve returnable glass presentation for brand Coca-Cola, catering to families across our operations. Consistent with our long-term strategy, through our growing portfolio of returnable presentations, we always look to provide the right product in the right package at the right price for every consumer.

Additionally, we carried on expanding our Magic Price Points Strategy throughout our franchise territories. Thanks to this strategy, we are increasing the availability of our affordably priced, one-way PET presentations—from our 200-ml and 300-ml packages in Brazil and Mexico to our 1.4-liter package in Colombia—enabling us to connect more closely with the ever-evolving needs of our consumers.

Constant Growth

Despite the prevailing consumer landscape, we generated solid currency-neutral organic growth in 2014. Excluding the non-comparable results from the recently integrated territories in Mexico and Brazil, our organic revenues and income from operations rose 4.1% and 10.8%, respectively. The main drivers of our performance for the year were our committed team, organizational flexibility, proactive revenue management initiatives, and ability to adapt our broad portfolio of beverages, particularly our wide array of returnable presentations, to connect with cost-conscious consumers across our franchise territories, increasing transactions by 11.2% during the year.

In a difficult environment, we integrated the operations of Companhia Fluminense and Spaipa, solidifying our position as Brazil’s leading Coca-Cola bottler. Thanks to our team’s efforts, we captured our targeted synergies of approximately US$52 million during the year faster than anticipated. Beyond the synergies, the cross-fertilization of talent and best practices are key ingredients to success. This was no different with the integration of these franchises, as many of their talented executives now occupy important positions in Coca-Cola FEMSA’s operations. Moreover, in terms of best practices, Companhia Fluminese’s award-winning execution in the modern trade channel, coupled with Spaipa’s exemplary distribution in the traditional sales channel, is helping us to reach our customers and consumers more efficiently and effectively than ever.

During the year, the strategic capital investments we made in every one of our markets create a strong foundation for growth, enabling us to take advantage of the opportunities that will arise in the future. Among our investments, we continue to enhance our cooler coverage—a distinct competitive advantage—across our franchise territories. We remain at the forefront of technology through our installation of high-speed tri-block bottling lines and the ongoing rollout of our efficient warehouse management system. We further continue our construction of sustainable, state-of-the-art bottling facilities, including our recently opened plant in Itabirito, Brazil. With an annual capacity of 200 million unit cases, this facility is built to LEED certification standards and offers additional flexibility for future expansion. Through these investments, we maximize our operations’ capacity to achieve the full potential of our business more efficiently, productively, and profitably.

Furthermore, Coca-Cola FEMSA embarked on an aggressive organizational transformation to ensure that we have the right capabilities to drive our competitiveness and prepare for the next wave of growth. Among our actions, we redesigned our corporate structure to strengthen the core functions of the organization. We established centers of excellence, focused on our supply chain, commercial, and IT innovation areas. We commenced streamlining and de-layering our organization to create a tighter, leaner, more agile management that will enable greater efficiency and bring us closer to our customers. Additionally, we are reinforcing our talent management: recognizing and rewarding performance, developing leaders, and fostering a talent culture throughout the company. Looking forward, the measures that we are undertaking position us better to transform today’s challenges into opportunities and to deliver sustainable value for our stakeholders.

Gross profit grew 13.9% to Ps. 39.4 billion, resulting in a 50 basis point gross margin expansion to 35.9% of total revenues. Income from operations increased 9.8% to Ps. 8.7 billion. Operating expenses grew slightly ahead of revenues, reflecting the incorporation and strengthening of our new drugstore and quick-service restaurant operations, the solid growth in our new OXXO stores, and the continued rollout of our new initiatives. As a result, our operating margin contracted slightly when compared to the prior year.

Consumer Focus

At OXXO, we continue to enhance our value proposition to satisfy our shoppers’ needs through an attractive array of quality products and services. Among our initiatives, we continue to broaden the scope of our convenient one-stop financial services. To optimize our consumers’ time, we carried on expanding our correspondent bank program to encompass five leading financial institutions. Through this program, within certain transaction parameters, we enable customers to make cash deposits and withdrawals to both their checking and credit card accounts at any of OXXO’s stores across the country. As consumers realize the advantages of this readily accessible functionality, we look forward to sustained growth in the adoption of this program—particularly since the number of our OXXO stores is already comparable to the combined number of branches of every bank in the country.

In January 2014, we launched Saldazo, a co-branded debit card with Banamex and Visa, which also serves as OXXO’s loyalty program. An unqualified success with our consumers, we issued these new debit cards at a rate of over 100,000 per month, reaching more than 1.4 million debit card accounts for the year. Beyond generating greater customer loyalty and traffic, these cards will enable us to gather useful data about our shoppers’ particular preferences and practices, so we can better tailor our promotional activity to our consumers’ individual needs.

Moreover, given the difficult economic environment, we continued to work with our consumers to provide a substantial offering of high quality, competitively priced private label products to satisfy their tastes. While our Bitz brand snacks, candy, and baked goods indulge our shoppers’ cravings, our broad selection of staples—from canned vegetables, milk, and beans to diapers, detergent, and toilet paper—replenish and fulfill our customers’ daily requirements.

Furthermore, to satisfy our consumers’ hunger at any time of day, we shifted from a promising pilot to the segmented rollout of our O‘Sabor brand menu of tacos, burritos, tortas, tamales, and pizzas. Indeed, our base menu of O‘Sabor brand tacos and burritos is already available at more than 340 high-traffic locations. Through this initiative, along with our systematic progress along the entire prepared food supply chain, we are just beginning to unlock the potential of this promising consumption occasion.

By efficiently, conveniently, and reliably serving and satisfying their needs, OXXO is an increasingly important part of the lives of consumers across Mexico. The myriad transactions carried out at OXXO—more than 9 million a day and more than 3 billion a year—means that the chain continues to secure its position as the preeminent choice for suppliers and shoppers throughout the country.

Constant Growth

We managed to navigate significant headwinds to produce same-store sales growth of 2.7%—outperforming the rate of growth of our industry. In addition to our same-store sales growth, we continued with our long-term strategy to expand OXXO’s leadership position as Mexico’s largest and fastest growing modern small-format store chain. In 2014, we opened a record 1,132 new stores for a total of 12,853 stores in Mexico and Colombia.

Beyond OXXO, FEMSA Comercio strengthened its position in the complementary drugstore sector, developing an important avenue for growth that leverages our capability and our platform across small retail formats. Building on our acquisitions of Farmacias YZA and Farmacias FM Moderna in 2013, we leveraged our in-depth understanding of our consumers and our expertise operating a national small-box retail chain to enhance the value proposition of our initial base over 500 drugstores, while opening more than 90 new drugstores over the course of the year. These stores appeal to consumers’ evolving demand for more specialization, focusing primarily on pharmaceutical and health and beauty products, as well as a limited array of convenience categories such as soft drinks and snacks.

Additionally, in December 2014, we agreed to acquire Farmacias Farmacón, an important drugstore operator with over 200 stores in the western states of Sinaloa, Sonora, Baja California, and Baja California Sur, strengthening our position in the northwest of the country. Through this transaction, we are advancing our strategy to play a relevant role in an attractive, still-fragmented industry, where we can leverage our capabilities to develop another successful small-box retail format.

Furthermore, we made great strides in the integration of Doña Tota, a leading quick-service restaurant operator with a strong brand and more than 200 outlets in Mexico and the U.S. Consequently, we are now well positioned for a new phase of growth of this promising stand-alone format in the coming year.

Sustainability Pillars: 2014 Highlights

Our People. We invested US$73.3 million for onsite and online training, health and safety initiatives, and programs fostering the comprehensive development of our employees and their families, including volunteering.

Our Planet. We invested US$51.7 million to continue advancing our objectives: Minimizing our impact on the environment through optimizing water use; Decreasing our waste by implementing measures such as our Zero Waste Facility program; and Optimizing our energy use by incorporating efficient technologies and integrating renewable energy sources.

Our Community. We invested US$24 million toward our goal of achieving more sustainable communities by: Supporting education through programs such as Coordinates for Life; Fostering healthy and active lifestyles with the Sign Up to Play initiative; Developing communities through the Polygon Edison Trust in Monterrey, Mexico, and Citizen’s Plaza in Brazil; Empowering social and environmental entrepreneurs through initiatives such as Youth with Value; and, Supporting great institutions such as Ashoka, The Impact Hub, ANDE, The Pool, and Global Social Business Summit, among others.

In partnership with The Coca-Cola Company Latin America and the Millennium Water Alliance, the Foundation ran the Water Links program for its second year. During 2014, this program enabled more than 52,000 people in marginalized communities across five countries to gain access to safe water, sanitation, and hygiene. Ultimately, Water Links looks to build sustainable, healthy long-term communities, while sharing best practices among implementers through a knowledge platform where partners communicate lessons learned to their peers.

In 2011, we joined The Nature Conservancy (TNC), IDB, and the Global Environment Facility (GEF) to create the Latin American Water Funds Partnership. The Partnership leveraged over US$27 million to invest as seed capital in regional water funds to positively impact three million hectares of natural ecosystems. Revenue from these investments preserves key hydrological basins upstream that filter and regulate the water supply of some of the most important cities in the region.

Today, the Partnership has launched 17 Water Funds, benefiting 17 cities in six countries. In 2014, the Partnership joined forces with The Coca-Cola Company’s Latin Center Business Unit and its local bottlers to roll out the Water for Our Future initiative. With an investment of nearly US$7.4 million, this initiative is designed to protect, replenish, and restore 6.9 million cubic meters of water by protecting over 6,000 hectares of watersheds in seven countries across Latin America and the Caribbean. The initiative also aims to replenish the water used in the companies’ production processes and to strengthen water security in the region.

Quality of Life

In 2014, the Quality of Life area of FEMSA Foundation partnered with the Food Bank Association of Mexico to add a nutritional education component to the food delivery programs that they provide to disadvantaged families in 10 different cities across the country. In this way, we help them to prepare better, more nutritious meals for their families. One of the first of these efforts is the Comer en Familia (Eating With Your Family) program, conducted in collaboration with the Food Bank of Saltillo and other partners. A mobile kitchen staffed by nutritional experts travels throughout five communities in the southern part of Saltillo, Coahuila, every two weeks, teaching people better ways to use traditional staples to create higher quality, more nutritious recipes that they can prepare with affordable food for meals they can enjoy together with their families.

We also fostered the Sanos y Activos (Healthy and Active) program in schools in the southeastern states of Mexico, Quintana Roo, Mérida, and Chiapas. This program has already benefited more than 6,900 children between the ages of eight and 14 in 36 schools by promoting nutritional education, sports, and physical activity. The program also conducted 16 workshops for parents and teachers and created 34 Health Clubs in which 430 children actively participate within the schools—thereby improving the social environment and ensuring sustainable change in the communities.