Delayed Nyse  -  05/20 04:00:01 pm EDT
60.98 USD   +1.63%
05/18Coca-Cola Down Over 5%, on Pace for Largest Percent Decrease Since June 2020 -- Data Talk
05/16The Coca-Cola Company to Participate in Upcoming Investor Conferences
05/13COCA-COLA CO : Receives a Buy rating from Credit Suisse
SummaryMost relevantAll NewsAnalyst Reco.Other languagesPress ReleasesOfficial PublicationsSector newsMarketScreener Strategies

Diluted Mexico tax reform gives retailers relief but no panacea

09/11/2013 | 04:45pm EDT
Mexico's President Enrique Pena Nieto smiles during the presentation of the fiscal reform at Los Pinos presidential residence in Mexico City

MEXICO CITY (Reuters) - Mexico's retailers dodged a bullet when the government shied away from including a sales tax on food and medicine in a proposed fiscal overhaul, but the watered-down reform could end up hurting them.

President Enrique Pena Nieto on Sunday proposed raising taxes for higher earners, putting a levy on stock market gains and boosting social programs to help the poor, but he decided against a controversial sales tax on food and medicine that many thought was key to boosting Mexico's anemic tax revenues.

The surprise decision on the sales tax provided an instant pick-me-up for Mexico's retailers, which have been hit by falling sales as economic growth slows. But the tax plan may not be a long-term positive for them if it means, as many analysts expect, a slack economy and softer demand from consumers.

The stocks of both Wal-Mart de Mexico (>> Wal-mart de Mexico S A B de C V), Mexico's biggest retailer also called Walmex, and Grupo Chedraui (>> Grupo Comercial Chedraui SAB de CV) have risen around 8 percent since the reform was announced. Comercial Mexicana (>> Controladora Comercial Mexicana SAB de C), known as Comerci, has gained about 6 percent.

Despite the retailers' short-term gains, rating agencies and analysts question whether the reform will go far enough to boost Mexico's tax take and help drive the economy toward Pena Nieto's aim of 6 percent growth by 2018.

And retailers are still concerned about the economy, which is expected to grow less than 2 percent this year.

"As regards VAT, more than a benefit, we think instead there will be no impact on consumer purchasing power," said Chedraui spokesman Jesus Velazquez. "In terms of demand, we still see it as vulnerable and are hoping it picks up in the fourth quarter."

Mexican retailers' same-store sales have fallen steadily this year, dropping 2.3 percent in July and bobbing just above flat for the year, according to the ANTAD trade group, which had expected growth of 5 percent for 2013.

Walmex sales have also fallen, notching consecutive months of declines in July and August, leading the company to scale back investment for this year by more than 10 percent and curb plans for new store openings.

Walmex and Comerci declined to comment while ANTAD did not immediately respond to requests.

"It's a massive relief (for the retailers) as regards the sales tax but it's a difficult environment and growth is hard at the moment," said Gerardo Roman, head of stock trading at Actinver brokerage in Mexico City.

"I don't think it (the reform) is enough to spur growth and consumption, or to turn the tide on the sector's poor performance in recent months," he added.

In a surprise move that underlined policymakers' concerns about the economy, the central bank cut its benchmark interest rate last week to 3.75 percent, its lowest-ever level, and left the door open to further cuts.

"With no sales tax on food and medicine, government income will be less and so growth prospects and internal demand will be lower than expected for the next few years," said Carlos Gonzalez, head of analysis at Monex financial group.

It remains to be seen how effective the reform will be in bringing Mexico's vast informal sector, about half the workforce, into the tax system.

A sales tax on food and medicine is seen as the best way of taxing the informal sector, as it broadens the number of taxable goods used by all sectors of society, but such a move was a red flag to Mexico's left-leaning opposition who say it would disproportionately affect the poor.

Pena Nieto is pushing a series of reforms - to the tax system, the energy and telecoms industries and public education - as part of efforts to revitalize Latin America's No. 2 economy.

Although Pena Nieto decided against the VAT on food and medicine, there is plenty in his tax reform for retailers to worry about, including the elimination of special tax breaks enjoyed by Mexican companies.

Among the retailers, Comerci has the largest deferred tax asset, according to JP Morgan. Under the new proposal, companies that built up those assets through offsetting losses at subsidiaries may have to write those assets down.

Furthermore, the reform proposal hits the middle class, a key demographic for the retailers, with the top rate of tax rising to 32 percent from 30 percent for those earning more than 500,000 pesos ($37,800) a year and a levy on private education.

Gonzalez said he expects retailers to cut costs and offer special deals.


The tax reform proposals appear toughest on Mexico's bottlers, who would be hit by a levy that the government hopes will collect close to $1 billion a year.

The government plans to apply a 1 peso per liter ($0.076) excise on sugary drinks aimed at curbing Mexico's sky-high obesity rate, weighing on bottlers like Coca-Cola FEMSA (>> Coca-Cola FEMSA, S.A.B. de C.V.), Arca Continental (>> Arca Continental, S.A.B. de C.V) and Pepsi bottler Cultiba (>> Organizacion Cultiba SAB de CV).

Their shares fell sharply after talk of a soda tax began circulating in August although they have picked back up this week as, traders said, the market had already priced in the tax.

Coca-Cola FEMSA is up 2.5 percent, while Arca is up nearly 3 percent since the reform was announced.

The soda industry, however, is fighting back.

"This is not a tax on drinks, this is a tax on the people who drink those drinks," said Emilio Herrera, head of national soda producer association ANPRAC. "It disproportionately punishes Mexican families on lower incomes."

"A beverage tax is not justified," Coca-Cola de Mexico said in a statement. "People get calories from many food and beverage sources, and a tax on one product will not solve a problem as complex as obesity."

Analysts say Coca-Cola FEMSA, a venture between Coca-Cola Co (>> The Coca-Cola Company) and Mexican retail and bottling company FEMSA (>> Fomento Economico Mexicano, SAB de CV), would not be too badly hit if the reform is approved by Congress given its assets across Latin America, which, according to Banorte, represented 55 percent of its sales at the end of 2012.

In a research note, Credit Suisse said Pepsi bottler Cultiba would suffer the most from the levy given its cheaper price point. Banorte highlighted Arca as the biggest loser as 84 percent of the company's volume is potentially affected.

Coca-Cola FEMSA also benefits from a wider portfolio of non-taxable drinks like water, Banorte added.

($1 = 13.16 pesos)

(Additional reporting by Atossa Abrahamian in New York, Veronica Gomez in Mexico City and Gabriela Lopez in Monterrey; Editing by Simon Gardner, Kieran Murray and Cynthia Osterman)

By Gabriel Stargardter

© Reuters 2013
Stocks mentioned in the article
ChangeLast1st jan.
ARCA CONTINENTAL, S.A.B. DE C.V. 2.29% 132.1 End-of-day quote.1.21%
COCA-COLA FEMSA SAB DE CV 0.00%End-of-day quote.0.00%
FOMENTO ECONÓMICO MEXICANO, S.A.B. DE C.V. -0.63% 147.68 End-of-day quote.-7.31%
GRUPO COMERCIAL CHEDRAUI, S.A.B. DE C.V. -1.04% 54.08 End-of-day quote.27.49%
ORGANIZACIÓN CULTIBA, S.A.B. DE C.V. -2.68% 9.8 End-of-day quote.-25.42%
ORGANIZACIÓN SORIANA, S. A. B. DE C. V. 0.28% 21.35 End-of-day quote.-17.82%
THE COCA-COLA COMPANY 1.63% 60.98 Delayed Quote.2.99%
WAL-MART DE MÉXICO, S.A.B. DE C.V. 0.00%End-of-day quote.0.00%
05/18Coca-Cola Down Over 5%, on Pace for Largest Percent Decrease Since June 2020 -- Data Ta..
05/16The Coca-Cola Company to Participate in Upcoming Investor Conferences
05/13COCA-COLA CO : Receives a Buy rating from Credit Suisse
05/12FIFA World Cup(TM) Trophy Tour by Coca-Cola kicks off global journey in Dubai
05/12FIFA World Cup™ Trophy Tour by Coca-Cola kicks off global journey in Dubai The FI..
05/12FIFA World Cup™ Trophy Tour by Coca-Cola Kicks Off Global Journey in Dubai
05/11Thinking about trading options or stock in Alibaba, ConocoPhillips, GameStop, Coca-Cola..
05/10Ex-Coca-Cola chemist sentenced to 14 years for stealing trade secrets for China
05/09INSIDER SELL : Coca Cola
05/03COCA-COLA BOTTLING : Q1 Earnings Snapshot
More news
Analyst Recommendations on THE COCA-COLA COMPANY
More recommendations
Financials (USD)
Sales 2022 41 938 M - -
Net income 2022 10 725 M - -
Net Debt 2022 28 290 M - -
P/E ratio 2022 24,6x
Yield 2022 2,86%
Capitalization 264 B 264 B -
EV / Sales 2022 6,98x
EV / Sales 2023 6,64x
Nbr of Employees 79 000
Free-Float 61,1%
Duration : Period :
The Coca-Cola Company Technical Analysis Chart | MarketScreener
Full-screen chart
Technical analysis trends THE COCA-COLA COMPANY
Short TermMid-TermLong Term
Income Statement Evolution
Mean consensus OUTPERFORM
Number of Analysts 26
Last Close Price 60,98 $
Average target price 69,82 $
Spread / Average Target 14,5%
EPS Revisions
Managers and Directors
James Quincey Chairman & Chief Executive Officer
Brian John S. Smith President & Chief Operating Officer
John Murphy Chief Financial Officer & Executive Vice President
Nancy W. Quan SVP, Chief Technical & Innovation Officer
Barry Charles Diller Independent Director
Sector and Competitors
1st jan.Capi. (M$)
COCA-COLA HBC AG-33.91%7 712