Mexico: Mexico's Femsa is flooding the market

Mexico's Femsa, Latin America's top soft drink and beer maker, is in top gear with retail chain Oxxo, opening four stores a day and helping drive sales of its Sol beer, Reuters reported March 1.

From October to December last year, Femsa executives cut the ribbon on 363 new Oxxo stores, minutes short of the equivalent of one every six hours, including holidays and weekends. Overall in 2006, Femsa opened 706 Oxxo outlets – which executives describe as 'mom and pop stores on steroids' – the 11th straight year of record openings.

It is now the largest chain of convenience stores in Latin America, with 4,847 outlets at the end of December and Femsa says there are still lots of room to expand.

"We will continue to aggressively grow our store base and build the capabilities required to strengthen our position as the leading store chain," chief financial officer Javier Astaburuaga said this week.

The 'win-win' business strategy is simple. Alongside snacks, chewing gum and newspapers, the stores sell Femsa's Coca-Cola products from its bottling unit and beers from its brewery.

Astaburuaga told analysts on a conference call that, in the next two or three years, the plan for Oxxo is to "saturate" some cities with stores and move into others.

"We are going to enter this year at least five new cities," he said.

But analysts see stumbling blocks ahead for Femsa's Oxxo store strategy.

Keeping up profit margins is becoming more difficult as Femsa expands southward from its northern base of Monterrey, one of the wealthiest urban areas in Mexico and where Oxxo stores abound.

Also, rival Mexican brewer Modelo, which makes Corona beer, is beefing up its own store division. Modelo's Extra is a copycat convenience chain, but currently number less than a quarter of the Oxxos in operation.

"As Oxxo increases its store base in more competitive and less affluent central Mexico, we believe productivity rates are waning," Merrill Lynch's Robert Ford said in a note.

In 2006, Modelo doubled its Extra stores to around 1,000 outlets, many of them in Mexico City where the brewer is based.

"The company appears on track to reach 2,000 units by year-end (2007)," Ford said of Modelo, which also brews Pacifico and Victoria beer.

That would be a faster expansion from Modelo than Femsa's 2006 performance. Modelo was not immediately available for comment.

"Over the coming two to three years, we see a wealth of opportunity (for Modelo) to drive stronger sales, improve in-stocks and shelf sets and efficiency and close the gap versus peers," Merrill Lynch's Ford said.

But the Oxxo division remains Femsa's star performer. Oxxo's sales jumped 15.1 percent in the final quarter of 2006, double the rate of Femsa's beer division and its soft drinks arm Coca-Cola Femsa

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