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Companies Brace For Mexican Food Fight
Government Levies on High-Calorie Snacks and Drinks Seeks to Curb Obesity
By AMY GUTHRIE, DAVID LUHNOW and JOSÉ DE CÓRDOBA
Updated Oct. 18, 2013
MEXICO CITY—A move by Mexico to slap special taxes on so-called junk food and sugary drinks this week is shaping up as a challenge for some of the world's biggest food and drink companies, especially as the fight against sugar threatens to expand into other major markets.
Mexico's lower house of Congress passed a bill this week that seeks to put a 5% excise tax on high-calorie packaged food including such staples as peanut butter and sweetened breakfast cereals. The tax comes alongside another planned levy on sugary soft drinks of 1 peso (8 U.S. cents) per liter that also passed the lower house.
The twin taxes pose a major challenge for some of the world's best known firms, including The Coca-Cola Co., Kellogg Co. K +1.18% and the Swiss food giant Nestlé S.A. NESN.VX -0.30% . Mexico is the biggest per capita consumer of Coca-Cola KO 0.00% products in the world and Latin America is the company's most profitable region after Europe, according to the company.
Coca-Cola Chief Executive Muhtar Kent Getty Images
Coca-Cola chief executive Muhtar Kent was concerned enough about the bill to place calls to Mexican President Enrique Peña Nieto and Finance Minister Luis Videgaray in recent weeks, according to people familiar with the matter.
Mr. Videgaray told Mr. Kent that Mexico would make decisions in its own interest, those people said.
"A tax on beverages is ineffective to combat a problem as complex as obesity," Coca-Cola said in a statement Friday. "To change behaviors effectively, we need to ensure people understand that when it comes to weight all calories count, regardless of the source—and that includes our caloric beverages too."
Mexico is the world's ninth largest market for processed food. Last year, it was the third-largest market by revenue for snack and drink maker PepsiCo, PEP +0.14% behind only the U.S. and Russia, contributing 6% of annual revenue, according to the company. Latin America as a whole represents 15.8% of total sales for Mondelez, the Deerfield, Ill.-based maker of brands like Oreo, Cadbury chocolates, and Philadelphia cream cheese.
Mexico's Senate is expected to pass both measures as part of a broader tax overhaul within weeks. The tax may hurt consumption, at least initially, in Mexico, but is unlikely to put much of a dent in global sales for big multinationals, analysts said. The bigger question is whether Mexican lawmakers will keep hiking taxes on junk food and sodas once they started and whether other countries will follow.
"I don't think anyone would say Mexico would have a substantial impact on these global companies," said Jonathan Feeney, an analyst at Janney Capital Markets. "The real question is whether this will be the first of many countries to do this."
Multinationals with a large presence in Mexico, such as PepsiCo and Nestlé, NESN.VX -0.30% referred comment to their local business chamber, the Mexican Consumer Products Industry Board, known as ConMéxico. in other countries
ConMéxico director Lorena Cerdán said the dozens of companies she represents are concerned about the precedent that the Mexican junk food tax sets in other countries.
If the initiative spreads to other parts of Latin America and the globe, it could begin to take on shades of the fight against tobacco waged by governments around the world, which hit cigarettes with ever-higher "sin" taxes. in the name of public health.
Denmark attempted a tax on foods with high levels of saturated fat in 2011, but repealed it just a year later, saying that it had failed to change Danes' eating habits and instead encouraged clandestine imports from bordering countries. But a nearly two-year-old tax on packaged foods with high levels of salt and sugar in Hungary appears to be changing consumption patterns, according to the World Health Organization.
If the Mexican policies prove successful, they might be replicated in other parts of the world, said Michael Jacobson, executive director of the Center for Science in the Public Interest in Washington.
"This is a landmark bill that could have an important impact on the obesity and diabetes epidemic," said Dr. Kelly Henning, who leads public health programs at Bloomberg Philanthropies. The group, which donated $10 million to several Mexican groups, including an NGO called Poder del Consumidor that pushed the tax, has publicly said success in Mexico may pave the way for similar policies in other developing nations.
Seven of 10 adults in Mexico, and a third of children, are either overweight or obese, according to government figures. Mexicans have now surpassed Americans for the title of the most overweight country in the OECD, according to the organization. Mexico has by far the highest death rates from diabetes in the OECD, with 152 deaths per 100,000 people compared with an average of 19 per 100,000 in the remaining 30 members of the organization.
To put that in perspective, Mexico's murder rate from its drug war and common crimes is about 20 per 100,000 people—meaning seven times more people die from diabetes every year in Mexico than murder.
Many Mexican companies reacted angrily on Friday to the measure, saying it could hurt investment at a time when Mexico's economy is struggling to grow. Mexican newspapers were full of full-page advertisements by industry and labor groups blasting the tax as a job-killer which wouldn't aid in the fight against obesity. "You don't fight obesity with taxes," said a full page newspaper advertisement paid for by the soft drink industry and its allies.
Mexico's food and beverage industry has an annual production of $124 billion or 4.1% of the country's GDP, generating 800,000 jobs, the industry says. Mondelez, MDLZ +0.12% for instance, just this summer announced a $350 million investment to build the world's largest cookie plant in Mexico. The company didn't comment on those plans.
Other advertisements, taken out by pro-tax NGOs, praised the congressional action. "Thank you [legislators]. You have demonstrated you care first about the health of Mexicans."
Mexican cartoonists had a field day with the tax. One cartoon showed Homer Simpson crying over a huge doughnut, while an obese Mexican policeman, drinking a soda and eating another doughnut, said: "Don't worry, this is Mexico."
"The Coke and Pepsi representatives down there I'm sure will get a big scolding," Mr. Jacobson said.
In a September report, Credit Suisse argued that Mexico could be a "game changer" on the global stage if the country, one of the world's biggest markets for soft drinks, imposed a significant excise tax on soft drinks.
Industrial food competes with an enormous informal market in Mexico that hawks snacks like stewed corn slathered in mayonnaise and sugarcoated breakfast rolls carted around neighborhoods by bicycle. There are half a million such street stalls in Mexico, according to chain restaurant operator Alsea.
"The possibility of product substitution is infinite," said Ms. Cerdán, arguing that many items that will be hit by the tax are household staples. Foods targeted by the junk food tax account for a quarter of purchases at government stores in poor, marginalized parts of the country, she said.
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