On January 1, 2014, Mexico became the first major soda-consuming country in the world to impose a national soft-drink tax, slapping an extra peso per liter onto sales of sugar- or syrup-sweetened sodas, juices, energy drinks and bottled tea and coffee. That very same day John Santa María assumed the chief executive role at Mexico Citybased Coca-Cola Femsa, the worlds largest independent Coca-Cola bottling group. At the time, Mexicos per capita soft-drink consumption was the worlds highest, and the country remains one of the most important markets for Coca-Cola Femsa, which serves Central America, South America and the Philippines. The tax was a blow for the company, but not the only one striking it: Extreme currency volatility, slower-than-expected GDP growth in Mexico and deceleration in Brazil also have dogged Coca-Cola Femsa in the two years since Santa María took over as CEO. In the midst of all this, however, the 57-year-old has achieved some gains for his company that are worthy of raising a glass.
When we look at currency-neutral results, were doing a very solid job, Santa María says. Were holding or growing share in all territories and countries. And were putting in place the strategic decisions that will make a difference in two to three years.
In 2015, Coca-Cola Femsa spent more than $500 million to open two new bottling facilities, in Brazil and Colombia, bringing its total to 65. Going forward, Santa María says, the company will spend roughly $650 million a year on the coolers, trays and refrigeration that will allow it to expand its retailing reach even as increasingly health-conscious consumers move away from Coca-Colas flagship beverage.
Santa María, like his company, has straddled multiple cultures and languages. Born in New York to first-generation Americans whose families came from Mexico and Bilbao, Spain, he moved to Mexico City at age seven, when his fathers career with pharmaceuticals maker Pfizer took the family there. He returned to the U.S. to attend Southern Methodist University in Dallas, dabbling in philosophy and oceanography before settling on an undergraduate degree in business. He went on to earn an MBA from SMU. When consulting giant McKinsey & Co., in search of bilingual MBA grads, contacted Santa María, he leaped at the opportunity, working out of the firms Mexico City office before moving back to New York.
A stint at PepsiCo followed. Santa María worked in corporate planning, first at the companys Purchase, New York, headquarters, then in London and Caracas. In the early 1990s he returned to Mexico City to become PepsiCos operations director for half of the country. In this role Santa María successfully helped lobby the Mexican government to deregulate the soft-drink industry. New laws removed pricing limits and allowed fizzy, sugary drinks to be sold in returnable plastic bottles rather than disposable glass ones.
Amid the industry boom that followed deregulation, several of the regions bottling companies went public. Among them was Femsa, a holding company that at the time had a large portfolio of Mexican beer brands, including Dos Equis Lager and Tecate. (In a 2010 deal Femsa traded its beer business for a 20 percent stake in Dutch brewer Heineken.) In 1993, Femsa formed a joint venture with Coca-Cola Co. As part of the agreement, Coke bought 30 percent of the new bottling entitys stock; 19 percent was listed on the Mexican Stock Exchange and the New York Stock Exchange.
In 1995, Santa María joined Coca-Cola Femsa as its chief operating officer for Mexico. He helped aggressively grow the then-$65 million operation, in part through manufacturing and distribution innovations. From there he moved into a role focused on M&A and corporate planning. On his watch Coca-Cola Femsa acquired Panamerican Beverages in 2003 a transformational, $3.6 billion purchase that made it the largest Coca-Cola bottler in Latin America and the second largest in the world. Santa María continued his rise through the company, and in 2013 he helped craft its strategic growth plan, which included the major infrastructure investments. That year Coca-Cola Femsa expanded into Asia with its acquisition of 51 percent of Coca-Colas bottling operation in the Philippines.
For the first nine months of 2015, Coca-Cola Femsa generated 105 billion pesos ($6.35 billion) in comparable revenue, up 8.1 percent from the same period the previous year. As CEO, Santa María continues to look for acquisitions and innovations that will maintain and accelerate Coca-Cola Femsas growth trajectory. Institutional Investor Senior Contributing Writer Katie Gilbert recently spoke with him about his growth plans and how the company has battled recent headwinds.
Institutional Investor: As consumers in some markets grow more health-conscious, theyre turning away from some of Coca-Colas flagship products. How is this affecting your business?
Santa María: Consumers around the world are looking at health and wellness. If its not natural, not healthy, not fresh, people are going to start walking away and look for different choices. That being said, in Mexico were seeing more awareness of this, but its not something that has significantly impacted our performance or our volumes. In Mexico were seeing strong volume growth.
Volume is one thing, but more important, we look at transactions. Consumers are getting more aware of what theyre drinking, and were putting beverages into smaller size packs, and were getting more transactions and points of connection with our consumers.
What do the health trends have to do with your innovation strategies?
It is something thats going to force us to continue to innovate. It is something we are doing very consciously: Were offering our consumers a portfolio of products of 110 different brands. About 45 percent of those brands are either no-sugar brands or water. Were opening up more and more choices for Coca-Cola: We have Coca-Cola Zero, Coca-Cola Light in Mexico. We also have Coca-Cola Life, which is the stevia-based product.
As we go through this, were developing a portfolio to give choices to people who are more concerned about caloric intake, about nonnatural sweeteners. Consumers are migrating to those spaces. Theyre doing so slower in Latin America. Itll always be different in Latin America because the landscape is different, but eventually theres going to be a certain part of the population that will be the same as the U.S. Thats going to be worldwide.
You often talk about the need to be a multicategory player. Are these health trends part of the reason?
Our strategic imperative for Coca-Cola Femsa is to go out and become a true multicategory beverage company over the short term that is, playing in seven or eight different categories that are very relevant to us and making sure we have the right type of manufacturing and route to markets and execution to become leaders in all of our beverage categories. I think were making good strides to get there.
Consumers are going into different beverages. It goes from water to teas to isotonics to energy drinks. If you were to tell me they want to walk away from just sugary beverages, then teas shouldnt be selling how theyre selling. Energy drinks shouldnt be selling how theyre selling. Flavored water shouldnt be selling how its selling. Its not just that. Consumers want additional choice as well. Thats something that forces us to go out there and have a much more ample portfolio.
Were seeing noncarbonated beverage growth in all our markets at rates that are higher than carbonated beverages. The consumer is moving toward those spaces. We just have to be in line with those spaces if we want to maintain or grow our total nonalcoholic ready-to-drink share throughout time. Its no longer just about soft drinks. Its about the total beverage portfolio.
How does that affect the various parts of your operations?
That has implications not only for the portfolio; it also is a different type of manufacturing requirement that you have, all the way to going out there and understanding different distribution systems. Were cautiously walking into the dairy industry, where were looking at milk, yogurts and ice creams. But a big platform in that whole area of dairy is refrigeration.
When you think about the scope and range of what that means, going from simple soft drinks all the way out to protein beverages that may need refrigeration or dairy beverages that require the same, thats a new aspiration for the company. How we get there is still a work in progress.
Tell us about how youve made your products more affordable, using smaller bottles and recyclable materials.
Were doing that all over the place. In Brazil last year we had a very strong relaunch of returnable, fillable PET bottles for Coke [made entirely from plant materials]. Weve done this in a couple of our primary markets, and were continuing to push that package. Were putting these packet prices at a point where theyre affordable for lower-income, everyday-value consumers. We want to make sure we have a Coke available for every pocketbook.
Has this affordable-packaging strategy helped drive growth in the Philippines, your newest market?
Were doing a similar thing in the Philippines. We understood there was an enormous amount of Filipinos who werent drinking Coke because our price point at 10 pesos [21 cents] was too high. So we came out with an eight-ounce returnable glass bottle in the Philippines we call Time Out. We price that returnable bottle at 7 pesos. And all of a sudden people are reengaging with our brands in the Philippines in a way we had never expected. Were gaining share in colas in the Philippines.
And that takes you to different technologies. For us to go out there and put into the marketplace a single-serve, one-way plastic presentation in the Philippines, were talking about filling little bottles at 81,000 bottles per hour. That is the largest line we have in our system. When you start putting those types of technologies into manufacturing, youre talking about lines that are probably $18 million to $20 million worth of investment just for one type of product.
In light of the current economic volatility in Latin America, youve said youre happier being a bottled-drink distributor than in a functionally driven category, like bleach or toothpaste. Why?
The drinks business is something that I dont think has functional boundaries. The more you have in front of you, the more you drink. Theres nothing that limits your capacity to consume other than the limit you want to put on yourself or the fact that you cant find it and its not available. When I start looking at industries that we want to be in, the beverage industry is a marvelous business because it grows beyond GDP in terms of per capita. It grows with your ability to go out and attain distribution and availability. And it grows every time we go out there and amplify portfolios and give people choice. Even though we have a lot of volatility right now, theres a lot of opportunity in this business.
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