Fomento Economico Mexicano S.A.B. de C.V. FMX, alias FEMSA, stays on the list of investors’ favorite beverage stocks, mainly because of effective growth strategies and strong market demand. The company continues to progress on the FEMSA Forward Strategy, which is focused on the long-term value creation of its core businesses — retail, Coca-Cola FEMSA KOF and Digital@FEMSA. Its retail business provides substantial opportunities for long-term growth, backed by improvements in the Proximity division.
FEMSA, the largest Bottler of Coca-Cola KO products, has been witnessing solid growth trends across all business units. FMX's digital initiatives, business expansion endeavors, and continued strength in OXXO Mexico and OXXO Gas have been aiding results. It also displays solid financial flexibility.
FEMSA Forward Strategy
FEMSA is advancing its FEMSA Forward Strategy, launched in February 2023, to create long-term value across its core businesses — retail (including the Health Division), Coca-Cola FEMSA and Digital@FEMSA. The strategy also involves exploring alternatives for its strategic businesses, including divestments. As part of this effort, FEMSA sold 13.9% of its outstanding shares in Heineken HEINY in 2023, lowering its stake to less than 1%.
FEMSA intends to divest its interests in Solística and other non-core businesses by April 2025 to minimize their impact on consolidated results. In 2023, FEMSA merged Envoy Solutions with BradyIFS, retaining a 37% ownership stake in the newly formed entity.
Focus on Retail Operations
FEMSA’s Proximity and Health retail businesses present significant long-term growth and value-creation opportunities. The company aims to boost earnings in its retail division through organic expansion, and by enhancing consumer value across various formats and markets. OXXO Mexico is crucial for FEMSA's retail operations, focusing on refining its value proposition while expanding its footprint. The OXXO store network in Mexico has grown substantially, surpassing 1,000 locations, with improved productivity per store. In its Health division, FEMSA is positioned to optimize purchasing, pricing, supply chain and other critical aspects through its multi-country platform and scale.
Building on its success in Mexico, FEMSA is accelerating the organic expansion of OXXO stores in South America, reaching 500 locations in Brazil and nearing that milestone in Colombia. The company expects OXXO in South America to achieve a scale comparable to that in Mexico. Additionally, FEMSA is expanding its Proximity discount format with Bara stores and developing other promising formats, such as coffee drive-throughs through a joint venture. In Europe, FEMSA plans to grow with the Valora platform, focusing on retail, food service and B2B segments.
Recently, FEMSA made a significant move to expand its retail presence in the United States by agreeing to acquire Delek US Holdings, Inc.'s retail subsidiaries for $385 million in cash. This deal, expected to close in the late third or fourth quarter of 2024, includes 249 convenience stores under the DK brand, mainly in Texas and New Mexico, with a smaller footprint in Arkansas and a small fuel transportation fleet. FEMSA views this acquisition as a strategic entry into the U.S. convenience and mobility market, aligning with its long-term growth strategy to enhance shareholder value.
Digital Initiatives
FEMSA is accelerating its digital initiatives through its tech and innovation unit, Digital@FEMSA, which aims to create a value-added digital and financial ecosystem for consumers and businesses. This unit enhances FEMSA’s core business verticals, with Coca-Cola FEMSA leading the way through an omni-channel approach, while the Proximity division drives digital initiatives within OXXO stores. The company is investing in digital offerings, loyalty programs and fintech platforms within its OXXO chains to strengthen its long-term position.
Headwinds to Overcome
FEMSA’s Health division is in a weak spot due to operations in various challenging macroeconomic and commercial environments. The Health division is facing complex competitive and regulatory challenges in several markets, particularly in Mexico. These issues contributed to a 0.4% year-over-year decline in total revenues for the segment in the second quarter, with same-store sales decreasing 1.1% in Mexican pesos.
Revenues were impacted by a persistently negative competitive landscape in Mexico and difficult macroeconomic conditions in Ecuador, although growth in Chile and Colombia partially offset these declines. These disappointing revenue trends also resulted in weaker operating results, with operating income falling 14.8% year over year and the operating margin contracting 70 basis points to 4.1%.
Despite these challenges, the company is committed to revitalizing the Health division by swiftly implementing country-specific strategies to address and reverse these negative trends. However, the timing of a near-term recovery for the segment remains uncertain as these efforts progress.
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CocaCola Company (The) (KO) : Free Stock Analysis Report
Fomento Economico Mexicano S.A.B. de C.V. (FMX) : Free Stock Analysis Report
Coca Cola Femsa S.A.B. de C.V. (KOF) : Free Stock Analysis Report
Heineken NV (HEINY) : Free Stock Analysis Report
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