Fomento Economico Mexicano SAB de CV
MEXICAN ECONOMIC DEVELOPMENT INC (Form: 20-F, Received: 04/21/2017 17:05:05)
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As filed with the Securities and Exchange Commission on April 21, 2017

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 20-F

ANNUAL REPORT PURSUANT TO SECTION 13

OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2016

Commission file number 001-35934

Fomento Económico Mexicano, S.A.B. de C.V.

(Exact name of registrant as specified in its charter)

Mexican Economic Development, Inc.

(Translation of registrant’s name into English)

United Mexican States

(Jurisdiction of incorporation or organization)

General Anaya No. 601 Pte.

Colonia Bella Vista

Monterrey, NL 64410 Mexico

(Address of principal executive offices)

 

 

Juan F. Fonseca

General Anaya No. 601 Pte.

Colonia Bella Vista

Monterrey, NL 64410 Mexico

(52-818) 328-6167

[email protected]

(Name, telephone, e-mail and/or facsimile number and

address of company contact person)

 

 

Securities registered or to be registered pursuant to Section 12(b) of the Act:

 

Title of each class:

        

Name of each exchange on which registered:

American Depositary Shares, each representing 10 BD Units, and each BD Unit consisting of one Series B Share, two Series D-B Shares and two Series D-L Shares,

without par value

     New York Stock Exchange
2.875% Senior Notes due 2023      New York Stock Exchange
4.375% Senior Notes due 2043      New York Stock Exchange

 


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Securities registered or to be registered pursuant to Section 12(g) of the Act:

None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:

None

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report:

 

2,161,177,770

   BD Units, each consisting of one Series B Share, two Series D-B Shares and two Series D-L Shares, without par value. The BD Units represent a total of 2,161,177,770 Series B Shares, 4,322,355,540 Series D-B Shares and 4,322,355,540 Series D-L Shares.

1,417,048,500

   B Units, each consisting of five Series B Shares without par value. The B Units represent a total of 7,085,242,500 Series B Shares.

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

 

☒  Yes

   ☐  No

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

 

☐  Yes

   ☒  No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). N/A

 

☐  Yes

   ☐  No

Indicate by check mark whether the registrant: (1) has filed all reports required to be file by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.

 

☒  Yes

   ☐  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” and emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large Accelerated filer  ☒    Accelerated filer  ☐
Non-accelerated filer  ☐    Emerging growth company  ☐

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act.  

 

The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

 

U.S. GAAP  ☐

   IFRS  ☒    Other  ☐

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.

 

☐ Item 17

   ☐ Item 18

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

☐  Yes

   ☒  No

 

 

 


Table of Contents

INTRODUCTION     

     1  

References

     1  

Currency Translations and Estimates

     1  

Forward-Looking Information

     1  

ITEMS 1.-2.

 

NOT APPLICABLE

     2  

ITEM 3.

 

KEY INFORMATION

     2  

Selected Consolidated Financial Data

     2  

Dividends

     4  

Exchange Rate Information

     6  

Risk Factors

     7  

ITEM 4.

 

INFORMATION ON THE COMPANY

     21  

The Company

     21  

Overview

     21  

Corporate Background

     21  

Ownership Structure

     24  

Significant Subsidiaries

     25  

Business Strategy

     25  

Coca-Cola FEMSA

     26  

FEMSA Comercio

     50  

Equity Investment in the Heineken Group

     60  

Other Business

     61  

Description of Property, Plant and Equipment

     61  

Insurance

     63  

Capital Expenditures and Divestitures

     63  

Regulatory Matters

     64  

ITEM 4A.

 

UNRESOLVED STAFF COMMENTS

     75  

ITEM 5.

 

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

     75  

Overview of Events, Trends and Uncertainties

     75  

Recent Developments

     75  

Effects of Changes in Economic Conditions

     76  

Operating Leverage

     77  

Critical Accounting Judgments and Estimates

     77  

Future Impact of Recently Issued Accounting Standards not yet in Effect

     81  

Operating Results

     83  

Liquidity and Capital Resources

     93  

ITEM 6.

 

DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

     102  

Directors

     102  

Senior Management

     110  

Compensation of Directors and Senior Management

     114  

 

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EVA Stock Incentive Plan

     115  

Insurance Policies

     115  

Ownership by Management

     116  

Board Practices

     116  

Employees

     118  

ITEM 7.

 

MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

     119  

Major Shareholders

     119  

Related-Party Transactions

     120  

Voting Trust

     120  

Interest of Management in Certain Transactions

     120  

Business Transactions between FEMSA, Coca-Cola FEMSA and The Coca-Cola Company

     122  

ITEM 8.

 

FINANCIAL INFORMATION

     123  

Consolidated Financial Statements

     123  

Dividend Policy

     123  

Legal Proceedings

     123  

Significant Changes

     124  

ITEM 9.

 

THE OFFER AND LISTING

     124  

Description of Securities

     124  

Trading Markets

     125  

Trading on the Mexican Stock Exchange

     125  

Price History

     126  

ITEM 10.

 

ADDITIONAL INFORMATION

     128  

Bylaws

     128  

Taxation

     135  

Material Contracts

     137  

Documents on Display

     144  

ITEM 11.

 

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     145  

Interest Rate Risk

     145  

Foreign Currency Exchange Rate Risk

     148  

Equity Risk

     152  

Commodity Price Risk

     152  

ITEM 12.

 

DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

     152  

ITEM 12A.

 

DEBT SECURITIES

     152  

ITEM 12B.

 

WARRANTS AND RIGHTS

     152  

ITEM 12C.

 

OTHER SECURITIES

     152  

ITEM 12D.

 

AMERICAN DEPOSITARY SHARES

     152  

ITEM 13.-14.

 

NOT APPLICABLE

     153  

ITEM 15.

 

CONTROLS AND PROCEDURES

     153  

ITEM 16A.

 

AUDIT COMMITTEE FINANCIAL EXPERT

     155  

 

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ITEM 16B.

 

CODE OF ETHICS

     156  

ITEM 16C.

 

PRINCIPAL ACCOUNTANT FEES AND SERVICES

     156  

ITEM 16D.

 

NOT APPLICABLE

     157  

ITEM 16E.

 

PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS

     157  

ITEM 16F.

 

NOT APPLICABLE

     157  

ITEM 16G.

 

CORPORATE GOVERNANCE

     157  

ITEM 16H.

 

NOT APPLICABLE

     159  

ITEM 17.

 

NOT APPLICABLE

     159  

ITEM 18.

 

FINANCIAL STATEMENTS

     159  

ITEM 19.

 

EXHIBITS

     160  

 

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INTRODUCTION

This annual report contains information materially consistent with the information presented in the audited consolidated financial statements and is free of material misstatements of fact that are not material inconsistencies with the information in the audited consolidated financial statements.

References

The terms “FEMSA,” “our company,” “we,” “us” and “our,” are used in this annual report to refer to Fomento Económico Mexicano, S.A.B. de C.V. and, except where the context otherwise requires, its subsidiaries on a consolidated basis. We refer to our former subsidiary Cuauhtémoc Moctezuma Holding, S.A. de C.V. (formerly FEMSA Cerveza, S.A. de C.V.) as “Cuauhtémoc Moctezuma” or “FEMSA Cerveza”, to our subsidiary Coca-Cola FEMSA, S.A.B. de C.V., as “Coca-Cola FEMSA”, to our subsidiary FEMSA Comercio, S.A. de C.V., as “FEMSA Comercio”, and to our subsidiary that holds our equity investment in Heineken, as “CB Equity.” FEMSA Comercio comprises a Retail Division, Fuel Division and Health Division, which we refer to as the “Retail Division”, “Fuel Division” and “Health Division”, respectively.

The term “S.A.B.” stands for sociedad anónima bursátil , which is the term used in the United Mexican States, or Mexico, to denominate a publicly traded company under the Mexican Securities Market Law ( Ley del Mercado de Valores ), which we refer to as the Mexican Securities Law.

References to “U.S. dollars,” “US$,” “dollars” or “$” are to the lawful currency of the United States of America (which we refer to as the United States). References to “Mexican pesos,” “pesos” or “Ps.” are to the lawful currency of Mexico. References to “euros” or “€” are to the lawful currency of the European Economic and Monetary Union (which we refer to as the Euro Zone).

As used in this annual report, “sparkling beverages” refers to non-alcoholic carbonated beverages. “Still beverages” refers to non-alcoholic non-carbonated beverages. Non-flavored waters, whether or not carbonated, are referred to as “waters.”

Currency Translations and Estimates

This annual report contains translations of certain Mexican peso amounts into U.S. dollars at specified rates solely for the convenience of the reader. These translations should not be construed as representations that the Mexican peso amounts actually represent such U.S. dollar amounts or could be converted into U.S. dollars at the rate indicated. Unless otherwise indicated, such U.S. dollar amounts have been translated from Mexican pesos at an exchange rate of Ps. 20.6170 to US$ 1.00, the noon buying rate for Mexican pesos on December 30, 2016, as published by the U.S. Federal Reserve Board in its H.10 Weekly Release of Foreign Exchange Rates. On April 12, 2017, this exchange rate was Ps. 18.7665 to US$ 1.00. See “Item 3. Key Information—Exchange Rate Information” for information regarding exchange rates since 2012.

To the extent estimates are contained in this annual report, we believe that such estimates, which are based on internal data, are reliable. Amounts in this annual report are rounded, and the totals may therefore not precisely equal the sum of the numbers presented.

Per capita growth rates and population data have been computed based upon statistics prepared by the Instituto Nacional de Estadística, Geografía e Informática of Mexico (National Institute of Statistics, Geography and Information, which we refer to as INEGI), the U.S. Federal Reserve Board and Banco de México (Bank of Mexico), local entities in each country and upon our estimates.

Forward-Looking Information

This annual report contains words, such as “believe,” “expect” and “anticipate” and similar expressions that identify forward-looking statements. Use of these words reflects our views about future events and financial performance. Actual results could differ materially from those projected in these forward-looking statements as a result of various factors that may be beyond our control, including but not limited to effects on our company from changes in our relationship with or among our affiliated companies, movements in the prices of raw materials, competition, significant developments in Mexico and the other countries where we operate, our ability to successfully integrate mergers and acquisitions we have completed in recent years, international economic or political conditions or changes in our regulatory environment. Accordingly, we caution readers not to place undue reliance on these forward-looking statements. In any event, these statements speak only as of their respective dates, and we undertake no obligation to update or revise any of them, whether as a result of new information, future events or otherwise.

 

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ITEMS 1-2. NOT APPLICABLE

ITEM 3.       KEY INFORMATION

Selected Consolidated Financial Data

This annual report includes (under Item 18) our audited consolidated statements of financial position as of December 31, 2016 and 2015, and the related consolidated income statements, consolidated statements of comprehensive income, changes in equity and cash flows for the years ended December 31, 2016, 2015 and 2014. Our audited consolidated financial statements are prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”).

Pursuant to IFRS, the information presented in this annual report presents financial information for 2016, 2015, 2014, 2013, and 2012 in nominal terms in Mexican pesos, taking into account local inflation of any hyperinflationary economic environment and converting from local currency to Mexican pesos using the official exchange rate at the end of the period published by the local central bank of each country categorized as a hyperinflationary economic environment (for this annual report, only Venezuela). Furthermore, for our Venezuelan entities we were able to convert local currency using one of the three legal exchange rates in that country. For further information, see Notes 3.3 and 3.4 to our audited consolidated financial statements. For each non-hyperinflationary economic environment, local currency is converted to Mexican pesos using the year-end exchange rate for assets and liabilities, the historical exchange rate for equity and the average exchange rate for the income statement. See Note 3.3 to our audited consolidated financial statements.

Our non-Mexican subsidiaries maintain their accounting records in the currency and in accordance with accounting principles generally accepted in the country where they are located. For presentation in our consolidated financial statements, we adjust these accounting records into IFRS and report in Mexican pesos under these standards.

Except when specifically indicated, information in this annual report on Form 20-F is presented as of December 31, 2016 and does not give effect to any transaction, financial or otherwise, subsequent to that date.

 

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The following table presents selected financial information of our company. This information should be read in conjunction with, and is qualified in its entirety by reference to, our audited consolidated financial statements, including the notes thereto. The selected financial information contained herein is presented on a consolidated basis, and is not necessarily indicative of our financial position or results at or for any future date or period; see Note 3 to our audited consolidated financial statements for our significant accounting policies.

 

     Year Ended December 31,  
     2016 (1)     2016 (2) (3)     2015 (2) (4)     2014 (2)     2013 (5)     2012 (6)  
     (in millions of Mexican pesos or millions of
U.S. dollars, except percentages and share and per share data)
 

Income Statement Data:

        

Total revenues

   $ 19,377     Ps. 399,507     Ps. 311,589     Ps. 263,449     Ps. 258,097     Ps. 238,309  

Gross Profit

     7,188       148,204       123,179       110,171       109,654       101,300  
Income before Income Taxes and Share of the Profit of Associates and Joint Ventures Accounted for Using the Equity Method      1,385       28,556       25,163       23,744       25,080       27,530  

Income taxes

     383       7,888       7,932       6,253       7,756       7,949  

Consolidated net income

     1,318       27,175       23,276       22,630       22,155       28,051  

Controlling interest net income

     1,025       21,140       17,683       16,701       15,922       20,707  
Non-controlling interest net income      293       6,035       5,593       5,929       6,233       7,344  
Basic controlling interest net income:         

Per Series B Share

     0.05       1.05       0.88       0.83       0.79       1.03  

Per Series D Share

     0.06       1.32       1.10       1.04       1.00       1.30  
Diluted controlling interest net income:         

Per Series B Share

     0.05       1.05       0.88       0.83       0.79       1.03  

Per Series D Share

     0.06       1.32       1.10       1.04       0.99       1.29  
Weighted average number of shares outstanding (in millions):         

Series B Shares

     9,246.4       9,246.4       9,246.4       9,246.4       9,246.4       9,246.4  

Series D Shares

     8,644.7       8,644.7       8,644.7       8,644.7       8,644.7       8,644.7  

Allocation of earnings:

        

Series B Shares

     46.11     46.11     46.11     46.11     46.11     46.11

Series D Shares

     53.89     53.89     53.89     53.89     53.89     53.89

Financial Position Data:

        

Total assets

   $ 26,465     Ps. 545,623     Ps. 409,332     Ps. 376,173     Ps. 359,192     Ps. 295,942  

Current liabilities

     4,185       86,289       65,346       49,319       48,869       48,516  

Long-term debt (7)

     6,401       131,967       85,969       82,935       72,921       28,640  

Other long-term liabilities

     1,998       41,197       16,161       13,797       14,852       8,625  

Capital stock

     162       3,348       3,348       3,347       3,346       3,346  

Total equity

     13,881       286,170       241,856       230,122       222,550       210,161  

Controlling interest

     10,279       211,904       181,524       170,473       159,392       155,259  

Non-controlling interest

     3,602       74,266       60,332       59,649       63,158       54,902  

Other Information

        

Depreciation

   $ 586     Ps. 12,076     Ps. 9,761     Ps. 9,029     Ps. 8,805     Ps. 7,175  

Capital expenditures (8)

     1,075       22,155       18,885       18,163       17,882       15,560  

Gross margin (9)

     37     37     40     42     42     43

 

(1) Translation to U.S. dollar amounts at an exchange rate of Ps. 20.6170 to US$ 1.00 solely for the convenience of the reader.
(2) The exchange rate used to translate our operations in Venezuela as of and for the year ended on December 31, 2016 was the DICOM rate of 673.76 bolivars to US$ 1.00 compared to the year ended on December 31, 2015 which was the SIMADI rate of 198.70 bolivars to US$ 1.00 and compared to the year ended on December 31, 2014 which was the SICAD-II rate of 49.99 bolivars to US$ 1.00. See Note 3.3 of our audited consolidated financial statements.
(3) Includes results of Vonpar, S.A. (“Vonpar” or “Group Vonpar”), from December 2016, and other business acquisitions. See “Item 4. Information on the Company—The Company—Corporate Background” and Note 4 to our audited consolidated financial statements.
(4) Includes results of Socofar, S.A. (“Socofar” or “Group Socofar”), from October 2015, the Fuel Division from March 2015 and other business acquisitions. See “Item 4. Information on the Company–The Company–Corporate Background” and Note 4 of our audited consolidated financial statements.
(5) Includes results of Coca-Cola FEMSA Philippines, Inc., or KOF Philippines (formerly Coca-Cola Bottlers Philippines, Inc.), from February 2013 using the equity method, Grupo Yoli, S.A. de C.V. (“Group Yoli”) from June 2013, Companhia Fluminense de Refrigerantes (“Companhia Fluminense”) from September 2013, Spaipa S.A. Indústria Brasileira de Bebidas (“Spaipa”) from November 2013 and other business acquisitions. See “Item 4. Information on the Company—Coca-Cola FEMSA—Corporate History,” Note 10 and Note 4 to our audited consolidated financial statements.
(6) Includes results of Grupo Fomento Queretano, S.A.P.I. de C.V. (“Group Fomento Queretano”) from May 2012. See “Item 4. Information on the Company—Coca-Cola FEMSA—Corporate” and Note 4 to our audited consolidated financial statements.
(7) Includes long-term debt minus the current portion of long-term debt.
(8) Includes investments in property, plant and equipment, intangible and other assets, net of cost of long lived assets sold, and write-off.
(9) Gross margin is calculated by dividing gross profit by total revenues.

 

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Dividends

We have historically paid dividends per BD Unit (including in the form of American Depositary Shares, or ADSs) approximately equal to or greater than 1% of the market price on the date of declaration, subject to changes in our results and financial position, including due to extraordinary economic events and to the factors described in “Item 3. Key Information—Risk Factors” that affect our financial condition and liquidity. These factors may affect whether or not dividends are declared and the amount of such dividends. We do not expect to be subject to any contractual restrictions on our ability to pay dividends, although our subsidiaries may be subject to such restrictions. Because we are a holding company with no significant operations of our own, we will have distributable profits and cash to pay dividends only to the extent that we receive dividends from our subsidiaries. Accordingly, we cannot assure you that we will pay dividends or as to the amount of any dividends.

The following table sets forth for each year the nominal amount of dividends per share that we declared in Mexican peso and U.S. dollar amounts and their respective payment dates for the 2012 to 2016 fiscal years:

 

Date Dividend Paid

  Fiscal Year
with  Respect to which
Dividend
was Declared
    Aggregate
Amount
of Dividend
Declared
    Per Series B
Share  Dividend
    Per Series B
Share  Dividend (7)
    Per Series D
Share  Dividend
    Per Series D
Share  Dividend (7)
 

May 3, 2012 and

November 6, 2012 (1)

    2011       Ps. 6,200,000,000       Ps. 0.3092     $ 0.0231       Ps. 0.3865     $ 0.0288  

May 3, 2012

        Ps. 0.1546     $ 0.0119       Ps. 0.1932     $ 0.0149  

November 6, 2012

        Ps. 0.1546     $ 0.0119       Ps. 0.1932     $ 0.0149  

May 7, 2013 and

November 7, 2013 (2)

    2012       Ps. 6,684,103,000       Ps. 0.3333     $ 0.0264       Ps. 0.4166     $ 0.0330  

May 7, 2013

        Ps. 0.1666     $ 0.0138       Ps. 0.2083     $ 0.0173  

November 7, 2013

        Ps. 0.1666     $ 0.0126       Ps. 0.2083     $ 0.0158  
December 18, 2013 (3)     2012       Ps. 6,684,103,000       Ps. 0.3333     $ 0.0257       Ps. 0.4166     $ 0.0321  

May 7, 2015 and November 5, 2015  (4)

    2014       Ps. 7,350,000,000       Ps. 0.3665     $ 0.0230       Ps. 0.4581     $ 0.0287  

May 7, 2015

        Ps. 0.1833     $ 0.0120       Ps. 0.2291     $ 0.0149  

November 5, 2015

        Ps. 0.1833     $ 0.0110       Ps. 0.2291     $ 0.01318  
May 5, 2016 and November 3, 2016 (5)     2015       Ps. 8,355,000,000       Ps. 0.4167     $ 0.0225       Ps. 0.5208     $ 0.0282  

May 5, 2016

        Ps. 0.2083     $ 0.0117       Ps. 0.2604     $ 0.0146  

November 3, 2016

        Ps. 0.2083     $ 0.0108       Ps. 0.2604     $ 0.0135  
May 5, 2017 and November 3, 2017 (6)     2016       Ps. 8,636,000,000       Ps. 0.4307       N/A       Ps. 0.5383       N/A  

May 5, 2017

        Ps. 0.2153       N/A       Ps. 0.2692       N/A  

November 3, 2017

        Ps. 0.2153       N/A       Ps. 0.2692       N/A  

 

(1) The dividend payment for 2011 was divided into two equal payments in Mexican pesos. The first payment was payable on May 3, 2012 with a record date of May 2, 2012, and the second payment was payable on November 6, 2012 with a record date of November 5, 2012.
(2) The dividend payment for 2012 was divided into two equal payments in Mexican pesos. The first payment was payable on May 7, 2013 with a record date of May 6, 2013, and the second payment was payable on November 7, 2013 with a record date of November 6, 2013.
(3) The dividend payment declared in December 2013 was payable on December 18, 2013 with a record date of December 17, 2013.
(4) The dividend payment for 2014 was divided into two equal payments in Mexican pesos. The first payment was payable on May 7, 2015 with a record date of May 6, 2015, and the second payment was payable on November 5, 2015 with a record date of November 4, 2015. The dividend payment for 2014 was derived from the balance of the net tax profit account for the fiscal year ended December 31, 2013. See Note 22 to our financial statements.
(5) The dividend payment for 2015 was divided into two equal payments. The first payment was payable on May 5, 2016 with a record date of May 4, 2016, and the second payment was payable on November 3, 2016 with a record date of November 1, 2016. The dividend payment for 2015 was derived from the balance of the net tax profit account for the fiscal year ended December 31, 2013. See Note 22 to our financial statements.
(6) The dividend payment for 2016 will be divided into two equal payments. The first payment will become payable on May 5, 2017 with a record date of May 4, 2017, and the second payment will become payable on November 3, 2017 with a record date of November 1, 2017. The dividend payment for 2016 was derived from the balance of the net tax profit account for the fiscal year ended December 31, 2013. See Note 22 to our financial statements.
(7) Translations to U.S. dollars are based on the exchange rates on the dates the payments were made.

 

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At the annual ordinary general shareholders meeting, or AGM, the board of directors submits the audited consolidated financial statements of our company for the previous fiscal year, together with a report thereon by the board of directors. Once the holders of Series B Shares have approved the audited consolidated financial statements, they determine the allocation of our net profits for the preceding year. Mexican law requires the allocation of at least 5% of net profits to a legal reserve, which is not subsequently available for distribution, until the amount of the legal reserve equals 20% of our paid in capital stock. As of the date of this report, the legal reserve of our company is fully constituted. Thereafter, the holders of Series B Shares may determine and allocate a certain percentage of net profits to any general or special reserve, including a reserve for open-market purchases of our shares. The remainder of net profits is available for distribution in the form of dividends to our shareholders. Dividends may only be paid if net profits are sufficient to offset losses from prior fiscal years.

Our bylaws provide that dividends will be allocated among the outstanding and fully paid shares at the time a dividend is declared in such manner that each Series D-B Share and Series D-L Share receives 125% of the dividend distributed in respect of each Series B Share. Holders of Series D-B Shares and Series D-L Shares are entitled to this dividend premium in connection with all dividends paid by us other than payments in connection with the liquidation of our company.

Subject to certain exceptions contained in the deposit agreement dated May 11, 2007, among FEMSA, The Bank of New York Mellon (formerly The Bank of New York), as ADS depositary, and holders and beneficial owners from time to time of our ADSs, evidenced by American Depositary Receipts, or ADRs, any dividends distributed to holders of our ADSs will be paid to the ADS depositary in Mexican pesos and will be converted by the ADS depositary into U.S. dollars. As a result, restrictions on conversion of Mexican pesos into foreign currencies may affect the ability of holders of our ADSs to receive U.S. dollars, and exchange rate fluctuations may affect the U.S. dollar amount actually received by holders of our ADSs.

 

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Exchange Rate Information

The following table sets forth, for the periods indicated, the high, low, average and year-end noon exchange rate, expressed in Mexican pesos per US$ 1.00, as published by the Federal Reserve Bank of New York. The rates have not been restated in constant currency units and therefore represent nominal historical figures.

 

Year ended December 31,

   Exchange Rate  
     High      Low      Average (1)      Year End  

2012

     14.37        12.63        13.14        12.96  

2013

     13.43        11.98        12.86        13.10  

2014

     14.79        12.85        13.35        14.75  

2015

     17.36        14.56        15.97        17.20  

2016

     20.84        17.19        18.70        20.62  

 

(1) Average month-end rates.

 

     Exchange Rate  
     High      Low      Period End  

2015:

        

First Quarter

     Ps. 15.58        Ps. 14.56        Ps. 15.25  

Second Quarter

     15.69        14.80        15.69  

Third Quarter

     17.10        15.67        16.90  

Fourth Quarter

     17.36        16.37        17.20  

2016:

        

First Quarter

     Ps. 19.19        Ps. 17.21        Ps. 17.21  

Second Quarter

     19.15        17.19        18.49  

Third Quarter

     19.86        17.98        19.34  

Fourth Quarter

     20.84        18.44        20.62  

October

     19.34        18.49        18.79  

November

     20.84        18.44        20.46  

December

     20.74        20.22        20.62  

2017:

        

January

     Ps. 21.89        Ps. 20.75        Ps. 20.84  

February

     20.82        19.74        20.00  

March

     19.93        18.67        18.83  

First Quarter

     21.89        18.67        18.83  

 

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RISK FACTORS

Risks Related to Our Company

Coca-Cola FEMSA

Coca-Cola FEMSA’s business depends on its relationship with The Coca-Cola Company, and changes in this relationship may adversely affect its business, financial condition, results of operations and prospects.

Substantially all of Coca-Cola FEMSA’s sales are derived from sales of Coca-Cola trademark beverages. Coca-Cola FEMSA produces, markets, sells and distributes Coca-Cola trademark beverages through standard bottler agreements in the territories where it operates. Coca-Cola FEMSA is required to purchase concentrate for all Coca-Cola trademark beverages from companies designated by The Coca-Cola Company, which price may be unilaterally determined from time to time by The Coca-Cola Company, in all such territories. Coca-Cola FEMSA is also required to purchase sweeteners and other raw materials only from companies authorized by The Coca-Cola Company. See “Item 4. Information on the Company—Coca-Cola FEMSA—Coca-Cola FEMSA’s Territories.” Pursuant to Coca-Cola FEMSA’s bottler agreements and as a shareholder, The Coca-Cola Company has the right to participate in the process for making certain decisions related to Coca-Cola FEMSA’s business.

In addition, under Coca-Cola FEMSA’s bottler agreements, Coca-Cola FEMSA is prohibited from bottling or distributing any other beverages without The Coca-Cola Company’s authorization or consent, and Coca-Cola FEMSA may not transfer control of the bottler rights of any of its territories without prior consent from The Coca-Cola Company.

The Coca-Cola Company makes significant contributions to Coca-Cola FEMSA’s marketing expenses, although it is not required to contribute a particular amount. Accordingly, The Coca-Cola Company may discontinue or reduce such contributions at any time.

Coca-Cola FEMSA depends on The Coca-Cola Company to continue with Coca-Cola FEMSA’s bottler agreements. Coca-Cola FEMSA’s bottler agreements are automatically renewable for ten-year terms, subject to the right of either party to give prior notice that it does not wish to renew the applicable agreement. In addition, these agreements generally may be terminated in the case of material breach. Termination of any such bottler agreement would prevent Coca-Cola FEMSA from selling Coca-Cola trademark beverages in the affected territory. The foregoing and any other adverse changes in Coca-Cola FEMSA’s relationship with The Coca-Cola Company would have an adverse effect on Coca-Cola FEMSA’s business, financial condition, results of operations and prospects.

The Coca-Cola Company has substantial influence on the conduct of Coca-Cola FEMSA’s business, which may result in Coca-Cola FEMSA taking actions contrary to the interests of its shareholders other than The Coca-Cola Company.

The Coca-Cola Company has substantial influence on the conduct of Coca-Cola FEMSA’s business. As of April 7, 2017, The Coca-Cola Company indirectly owned 28.1% of Coca-Cola FEMSA’s outstanding capital stock, representing 37.0% of Coca-Cola FEMSA’s capital stock with full voting rights. The Coca-Cola Company is entitled to appoint five of Coca-Cola FEMSA’s maximum of 21 directors and the vote of at least two of them is required to approve certain actions by Coca-Cola FEMSA’s board of directors. As of April 7, 2017, we indirectly owned 47.9% of Coca-Cola FEMSA’s outstanding capital stock, representing 63.0% of Coca-Cola FEMSA’s capital stock with full voting rights. We are entitled to appoint 13 of Coca-Cola FEMSA’s maximum of 21 directors and all of its executive officers. We and the Coca-Cola Company together, or only we in certain circumstances, have the power to determine the outcome of all actions requiring approval by Coca-Cola FEMSA’s board of directors, and we and The Coca-Cola Company together, or only we in certain circumstances, have the power to determine the outcome of all actions requiring approval of our shareholders. The interests of The Coca-Cola Company may be different from the interests of Coca-Cola FEMSA’s other shareholders, which may result in Coca-Cola FEMSA taking actions contrary to the interests of such other shareholders.

 

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Changes in consumer preferences and public concern about health related issues could reduce demand for some of Coca-Cola FEMSA’s products.

The non-alcoholic beverage industry is evolving mainly as a result of changes in consumer preferences and regulatory actions. There have been different plans and actions adopted in recent years by governmental authorities in some of the countries where Coca-Cola FEMSA operates, including an increase in taxes or the imposition of new taxes on the sale of beverages containing certain sweeteners, and other regulatory measures, such as restrictions on advertising for some of Coca-Cola FEMSA’s products. Moreover, researchers, health advocates and dietary guidelines are encouraging consumers to reduce their consumption of certain types of beverages sweetened with sugar and High Fructose Corn Syrup, or HFCS. In addition, concerns over the environmental impact of plastic may reduce the consumption of Coca-Cola FEMSA’s products sold in plastic bottles or result in additional taxes that would adversely affect consumer demand. Increasing public concern about these issues, new or increased taxes, other regulatory measures or Coca-Cola FEMSA’s failure to meet consumers’ preferences, could reduce demand for some of Coca-Cola FEMSA’s products, which would adversely affect its business, financial condition, results of operations and prospects.

The reputation of Coca-Cola trademarks and trademark infringement could adversely affect Coca-Cola FEMSA’s business.

Substantially all of Coca-Cola FEMSA’s sales are derived from sales of Coca-Cola trademark beverages owned by The Coca-Cola Company. Maintenance of the reputation and intellectual property rights of these trademarks is essential to Coca-Cola FEMSA’s ability to attract and retain retailers and consumers and is a key driver for its success. Failure to maintain the reputation of Coca-Cola trademarks and/or to effectively protect these trademarks could have a material adverse effect on Coca-Cola FEMSA’s business, financial condition, results of operations and prospects.

If Coca-Cola FEMSA is unable to protect its information systems against service interruption, misappropriation of data or breaches of security, Coca-Cola FEMSA’s operations could be disrupted, which could have a material adverse effect on its business, financial condition, results of operations and prospects.

Coca-Cola FEMSA relies on networks and information systems and other technology, or information systems, including the Internet and third-party hosted platforms and services to support a variety of business processes and activities, including procurement and supply chain, manufacturing, distribution, invoicing and collection of payments. Coca-Cola FEMSA uses information systems to process financial information and results of operations for internal reporting purposes and to comply with regulatory financial reporting and legal and tax requirements. Because information systems are critical to many of Coca-Cola FEMSA’s operating activities, Coca-Cola FEMSA’s business may be impacted by system shutdowns, service disruptions or security breaches. In addition, such incidents could result in unauthorized disclosure of material confidential information. Coca-Cola FEMSA could be required to spend significant financial and other resources to remedy the damage caused by a security breach or to repair or replace networks and information systems. Any severe damage, disruption or shutdown in Coca-Cola FEMSA’s information systems could have a material adverse effect on Coca-Cola FEMSA’s business, financial condition, results of operations and prospects.

Negative or inaccurate information on social media could adversely affect Coca-Cola FEMSA’s reputation.

In recent years, there has been a marked increase in the use of social media and similar platforms, including weblogs (blogs), social media websites, and other forms of Internet-based communications which allow individual access to a broad audience of consumers and other interested persons. Negative or inaccurate information concerning or affecting Coca-Cola FEMSA or the Coca-Cola trademarks may be posted on such platforms at any time. This information may harm our reputation without affording Coca-Cola FEMSA an opportunity for redress or correction, which could in turn have a material adverse effect on Coca-Cola FEMSA’s business, financial condition, results of operations and prospects.

 

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Competition could adversely affect Coca-Cola FEMSA’s business, financial condition, results of operations and prospects.

The beverage industry in the territories where Coca-Cola FEMSA operates is highly competitive. Coca-Cola FEMSA faces competition from other bottlers of sparkling beverages, such as Pepsi trademark products and other bottlers and distributors of local beverage brands, and from producers of low-cost beverages or “B brands.” Coca-Cola FEMSA also competes in beverage categories other than sparkling beverages, such as water, juice-based beverages, teas, sport drinks and value-added dairy products. Coca-Cola FEMSA expects that it will continue to face strong competition in its beverage categories in all of its territories and anticipate that existing or new competitors may broaden their product lines and extend their geographic scope.

Although competitive conditions are different in each of Coca-Cola FEMSA’s territories, Coca-Cola FEMSA competes mainly in terms of price, packaging, effective promotional activities, access to retail outlets and sufficient shelf space, customer service, product innovation and product alternatives and the ability to identify and satisfy consumer preferences. See “Item 4. Information on the Company—Coca-Cola FEMSA—Competition.” Lower pricing and activities by Coca-Cola FEMSA’s competitors and changes in consumer preferences may have an adverse effect on Coca-Cola FEMSA’s business, financial condition, results of operations and prospects.

Water shortages or any failure to maintain existing concessions could adversely affect Coca-Cola FEMSA’s business, financial condition, results of operations and prospects.

Water is an essential component of all of Coca-Cola FEMSA’s products. Coca-Cola FEMSA obtains water from various sources in its territories, including springs, wells, rivers and municipal and state water companies pursuant to either concessions granted by governments in its various territories (including governments at the federal, state or municipal level) or pursuant to contracts.

Coca-Cola FEMSA obtains the vast majority of the water used in its production from municipal utility companies and pursuant to concessions to use wells, which are generally granted based on studies of the existing and projected groundwater supply. Coca-Cola FEMSA’s existing water concessions or contracts to obtain water may be terminated by governmental authorities under certain circumstances and their renewal depends on several factors, including having paid all fees in full, having complied with applicable laws and obligations and receiving approval for renewal from local and/or federal water authorities. See “Item 4. Information on the Company—Regulatory Matters—Water Supply.” In some of Coca-Cola FEMSA’s other territories, Coca-Cola FEMSA’s existing water supply may not be sufficient to meet its future production needs, and the available water supply may be adversely affected by shortages or changes in governmental regulations and environmental changes.

Water supply in the Sao Paulo region in Brazil has been reduced in recent years by low rainfall, which has affected the main water reservoir that serves the greater Sao Paulo area (Cantareira). Although Coca-Cola FEMSA’s Jundiai plant does not obtain water from this water reservoir, water shortages or changes in governmental regulations aimed at rationalizing water in such region could affect its water supply in its Jundiai plant.

We cannot assure you that water will be available in sufficient quantities to meet Coca-Cola FEMSA’s future production needs or will prove sufficient to meet its water supply needs. Continued water scarcity in the regions where Coca-Cola FEMSA operates may adversely affect its business, financial condition, results of operations and prospects.

Increases in the prices of raw materials would increase Coca-Cola FEMSA’s cost of goods sold and may adversely affect its business, financial condition, results of operations and prospects.

In addition to water, Coca-Cola FEMSA’s most significant raw materials are (i) concentrate, which it acquires from affiliates of The Coca-Cola Company, (ii) sweeteners and (iii) packaging materials.

Prices for Coca-Cola trademark beverages concentrate are determined by The Coca-Cola Company as a percentage of the weighted average retail price in local currency, net of applicable taxes. The Coca-Cola Company has the right to unilaterally change concentrate prices or change the manner in which such prices are calculated. In the past, The Coca-Cola Company has increased concentrate prices for Coca-Cola trademark beverages in some of the countries where Coca-Cola FEMSA operates. Coca-Cola FEMSA may not be successful in negotiating or implementing measures to mitigate the negative effect this may have in the pricing of its products or its results.

 

 

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The prices for Coca-Cola FEMSA’s other raw materials are driven by market prices and local availability, the imposition of import duties and restrictions and fluctuations in exchange rates. Coca-Cola FEMSA is also required to meet all of its supply needs (including sweeteners and packaging materials) from suppliers approved by The Coca-Cola Company, which may limit the number of suppliers available to it. Coca-Cola FEMSA’s sales prices are denominated in the local currency in each country where it operates, while the prices of certain materials, including those used in the bottling of its products, mainly resin, preforms to make plastic bottles, finished plastic bottles, aluminum cans, HFCS and certain sweeteners, are paid in, or determined with reference to, the U.S. dollar, and therefore may increase if the U.S. dollar appreciates against the applicable local currency. Coca-Cola FEMSA cannot anticipate whether the U.S. dollar will appreciate or depreciate with respect to such local currencies in the future. See “Item 4. Information on the Company—Coca-Cola FEMSA—Raw Materials.”

Coca-Cola FEMSA’s most significant packaging raw material costs arise from the purchase of resin, the price of which is related to crude oil prices and global resin supply. Crude oil prices have a cyclical behavior and are determined with reference to the U.S. dollar; therefore, high currency volatility may affect Coca-Cola FEMSA’s average price for resin in local currencies. Since 2010, international sugar prices have been volatile due to various factors, including shifting demand, availability and climate issues affecting production and distribution. In all of the countries where Coca-Cola FEMSA operates, other than Brazil, sugar prices are subject to local regulations and other barriers to market entry that cause it to purchase sugar above international market prices. See “Item 4. Information on the Company—Coca-Cola FEMSA—Raw Materials.” We cannot assure you that Coca-Cola FEMSA’s raw material prices will not further increase in the future or that Coca-Cola FEMSA will be successful in mitigating any such increase through derivative instruments or otherwise. Increases in the prices of raw materials would increase Coca-Cola FEMSA’s cost of goods sold and adversely affect its business, financial condition, results of operations and prospects.

Taxes could adversely affect Coca-Cola FEMSA’s business, financial condition, results of operations and prospects.

The countries where Coca-Cola FEMSA operates may adopt new tax laws or modify existing tax laws to increase taxes applicable to its business or products. Coca-Cola FEMSA’s products are subject to certain taxes in many of the countries where it operates, which impose taxes on sparkling beverages. See “Item 4. Information on the Company—Regulatory Matters—Taxation of Sparkling Beverages.” The imposition of new taxes increases in existing taxes, or changes in the interpretation of tax laws and regulation by tax authorities may have a material adverse effect on Coca-Cola FEMSA’s business, financial condition, results of operations and prospects.

Tax legislation in some of the countries where Coca-Cola FEMSA operates has recently been subject to major changes. See “Item 4. Information on the Company—Regulatory Matters—Tax Reforms.” We cannot assure you that these reforms or other reforms adopted by governments in the countries where Coca-Cola FEMSA operates will not have a material adverse effect on its business, financial condition, results of operations and prospects.

Regulatory developments may adversely affect Coca-Cola FEMSA’s business, financial condition, results of operations and prospects.

Coca-Cola FEMSA is subject to several laws and regulations in each of the territories where it operates. The principal areas in which Coca-Cola FEMSA is subject to laws and regulations are water, environment, labor, taxation, health and antitrust. Laws and regulations can also affect Coca-Cola FEMSA’s ability to set prices for its products. See “Item 4. Information on the Company—Regulatory Matters.” Changes in existing laws and regulations, the adoption of new laws or regulations, or a stricter interpretation or enforcement thereof in the countries where Coca-Cola FEMSA operates may increase its operating and compliance costs or impose restrictions on its operations which, in turn, may adversely affect its financial condition, business, results of operations and prospects. In particular, environmental standards are becoming more stringent in several of the countries where Coca-Cola FEMSA operates. There is no assurance that Coca-Cola FEMSA will be able to comply with changes in environmental laws and regulations within the timelines established by the relevant regulatory authorities. See “Item 4. Information on the Company—Regulatory Matters—Environmental Matters.”

 

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Voluntary price restraints or statutory price controls have been imposed historically in several of the countries where Coca-Cola FEMSA operates. Currently, there are no price controls on Coca-Cola FEMSA’s products in any of the territories where it has operations, except for those in Argentina, where authorities directly supervise six of Coca-Cola FEMSA’s products sold through supermarkets as a measure to control inflation, and Venezuela, where price controls have been imposed on certain products, including bottled water, and a limit has been imposed on profits earned on the sale of goods, including Coca-Cola FEMSA’s products, in an effort to seek price stability of, and equal access to, goods and services. If Coca-Cola FEMSA exceeds such limit on profits, it may be forced to maintain or reduce the prices of its products in Venezuela, which would in turn adversely affect its business, financial condition, results of operations and prospects. In addition, consumer protection laws in Venezuela are subject to continuing review and changes, and any such changes may have an adverse impact on Coca-Cola FEMSA. We cannot assure you that existing or future laws and regulations in the countries where Coca-Cola FEMSA operates relating to goods and services (in particular, laws and regulations imposing statutory price controls) will not affect its products, or that Coca-Cola FEMSA will not need to implement voluntary price restraints, which could have a negative effect on its business, financial condition, results of operations and prospects. See “Item 4. Information on the Company—Regulatory Matters—Price Controls.”

Unfavorable outcome of legal proceedings could have an adverse effect on Coca-Cola FEMSA’s business, financial condition, results of operations and prospects.

Coca-Cola FEMSA’s operations have from time to time been and may continue to be subject to investigations and proceedings by antitrust authorities relating to alleged anticompetitive practices. Coca-Cola FEMSA also has been subject to investigations and proceedings on tax, consumer protection, environmental and labor matters. We cannot assure you that these investigations and proceedings will not have an adverse effect on Coca-Cola FEMSA’s business, financial condition, results of operations and prospects. See “Item 8. Financial Information—Legal Proceedings—Coca-Cola FEMSA.”

Weather conditions may adversely affect Coca-Cola FEMSA’s business, financial condition, results of operations and prospects.

Lower temperatures, higher rainfall and other adverse weather conditions such as typhoons and hurricanes may negatively impact consumer patterns, which may result in reduced sales of Coca-Cola FEMSA’s beverage offerings. Additionally, such adverse weather conditions may affect plant installed capacity, road infrastructure and points of sale in the territories where Coca-Cola FEMSA operates and limit its ability to produce, sell and distribute its products, thus affecting its business, financial condition, results of operations and prospects.

Coca-Cola FEMSA may not be able to successfully integrate its acquisitions and achieve the expected operational efficiencies or synergies.

Coca-Cola FEMSA has and it may continue to acquire bottling operations and other businesses. Key elements to achieving the benefits and expected synergies of its acquisitions and mergers are the integration of acquired or merged businesses’ operations into Coca-Cola FEMSA’s own in a timely and effective manner and the retention of qualified and experienced key personnel. Coca-Cola FEMSA may incur unforeseen liabilities in connection with acquiring, taking control of, or managing bottling operations and other businesses and may encounter difficulties and unforeseen or additional costs in restructuring and integrating them into its operating structure. We cannot assure you that these efforts will be successful or completed as expected by Coca-Cola FEMSA, and Coca-Cola FEMSA’s business, financial condition, results of operations and prospects could be adversely affected if it is unable to do so.

 

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FEMSA Comercio

Competition from other retailers in the markets where FEMSA Comercio operates could adversely affect its business, financial condition, results of operations and prospects.

The retail sector is highly competitive in the markets where FEMSA Comercio operates. The Retail Division participates in the retail sector primarily through its OXXO stores, which face competition from small-format stores like 7-Eleven, Circle K stores and other numerous chains of retailers across Mexico, and from other regional small-format retailers to small informal neighborhood stores. In particular, small informal neighborhood stores can sometimes avoid regulatory oversight and taxation, enabling them to sell certain products at prices below average market prices. In addition, these small informal neighborhood stores could improve their technological capabilities so as to enable credit card transactions and electronic payment of utility bills, which would diminish one of the Retail Division’s competitive advantages.

In the pharmacy sector, FEMSA Comercio participates through the Health Division in Mexico, Chile and Colombia. In Mexico, it faces competition from other drugstore chains such as Farmacias Guadalajara, Farmacias del Ahorro and Farmacias Benavides, as well as independent pharmacies, supermarkets and other informal neighborhood drugstores. In Chile, relevant competitors are chain drugstores such as Farmacias Ahumada and Salcobrand, while in Colombia, the most relevant competitors are La Rebaja and Copidrogas.

The Retail Division and the Health Division may face additional competition from new market participants. The increase in competition may limit the number of new store locations available and could require FEMSA Comercio to modify its product offering or pricing scheme. As a consequence, future competition may affect the financial situation, operation results and prospects of the Retail Division and the Health Division.

For the Fuel Division, the opening of the Mexican fuel distribution market is expected to alter the competitive dynamics of the industry. The consolidation process, expected to take place as large companies and international competitors enter the market may occur rapidly and materially alter the market dynamics in Mexico. Currently, the Fuel Division faces competition from small, independently owned and operated service stations, as well as from regional chains such as Corpogas, Hidrosina, Petro-7 and Orsan.

FEMSA Comercio’s points of sale performance may be adversely affected by changes in economic conditions in the markets where it operates.

The markets in which FEMSA Comercio operates are highly sensitive to economic conditions, because a decline in consumer purchasing power is often a consequence of an economic slowdown which in turn results in a decline in the overall consumption of main product categories. During periods of economic slowdown, FEMSA Comercio’s points of sale may experience a decline in same-store traffic and average ticket per customer, which may result in a decline in overall performance.

FEMSA Comercio’s business expansion strategy and entry into new markets and retail formats may lead to decreased profit margins.

FEMSA Comercio has recently entered into new markets through the acquisition of other small-format retail businesses such as quick-service restaurants. In recent years, the Retail Division and the Health Division have continued with this strategy. These new businesses are currently less profitable than OXXO, and might therefore marginally dilute FEMSA Comercio margins in the short to medium term.

Regulatory changes in Mexico may adversely affect FEMSA Comercio’s business.

In the markets where it operates, FEMSA Comercio is subject to regulation in areas such as labor, taxation, zoning, operations and related local permits and health and safety regulations. Changes in existing laws and regulations, the adoption of new laws or regulations, or a stricter interpretation or enforcement thereof in the countries where FEMSA Comercio operates may increase its operating and compliance costs or impose restrictions on its operations which, in turn, may adversely affect the financial situation, operation results and prospects of FEMSA Comercio’s business. In addition, changes in current laws and regulations may negatively impact customer traffic, revenues, operational costs and commercial practices, which may have an adverse effect on the financial situation, operation results and prospects of FEMSA Comercio.

 

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FEMSA Comercio’s business depends heavily on information technology and a failure, interruption, or breach of its IT systems could adversely affect it.

FEMSA Comercio’s businesses rely heavily on advanced information technology (which we refer to as IT) systems to effectively manage its data, communications, connectivity, and other business processes. FEMSA Comercio invests aggressively in IT to maximize its value generation potential. The development of IT systems, hardware and software needs to keep pace with the businesses’ growth due to the high speed at which the division adds new services and products to its commercial offerings. If these systems become obsolete or if the planning for future IT investments is inadequate, FEMSA Comercio businesses could be adversely affected.

Although FEMSA Comercio constantly improves and protects its IT systems with advanced security measures, they may still be subject to defects, interruptions, or security breaches such as viruses or data theft. Such a defect, interruption, or breach could adversely affect the financial situation, operation results and prospects of FEMSA Comercio.

FEMSA Comercio’s business may be adversely affected by an increase in the price of electricity in the markets where it operates.

The performance of FEMSA Comercio’s points of sale would be adversely affected by increases in the price of utilities on which the stores and stations depend, such as electricity. As an example, given the relevance of the Mexican market, the price of electricity in Mexico has generally remained stable or decreased in recent years, except for 2016, when the price gradually increased. Electricity prices could potentially increase further as a result of inflation, shortages, interruptions in supply, or other reasons, and such an increase could adversely affect the financial situation, operation results and prospects of FEMSA Comercio’s business.

Taxes could adversely affect FEMSA Comercio’s business.

The imposition of new taxes or increases in existing taxes, or changes in the interpretation of tax laws and regulations by tax authorities, may have a material adverse effect on the financial situation, operation results and prospects of FEMSA Comercio’s business.

The Retail Division may not be able to maintain its historic growth rate.

The Retail Division increased the number of OXXO stores at a compound annual growth rate of 9.5% from 2012 to 2016. The growth in the number of OXXO stores has driven growth in total revenue and results at the Retail Division over the same period. As the overall number of stores increases, percentage growth in the number of OXXO stores is likely to slow. In addition, as small-format store penetration in Mexico grows, the number of viable new store locations may decrease, and new store locations may be less favorable in terms of same-store sales, average ticket and store traffic. Thus, our future results and financial situation may not be consistent with prior periods and may be characterized by lower growth rates in terms of total revenue and results of operations. In Colombia, OXXO stores may not be able to achieve or maintain historic growth rates like those in Mexico. We cannot assure that the revenues and cash flows of the Retail Division that come from future retail stores will be comparable with those generated by existing retail stores.

The Health Division’s sales may be affected by a material change in institutional sale trends in some of the markets where it operates.

In some of the markets where the Health Division operates, sales are highly dependent of institutional sales, as well as traditional open market sales. The institutional market involves public and private health care providers, and the performance of the Health Division could be affected by its ability to maintain and grow its client base.

 

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The Health Division’s performance may be affected by contractual conditions with its suppliers.

The Health Division, especially in Mexico, acquires the majority of its inventories and healthcare products from a limited number of suppliers. Its ability to maintain favorable conditions in its current price and service agreements could potentially affect the Health Division’s operating and financial performance.

Energy regulatory changes may impact fuel prices and therefore adversely affect the Fuel Division’s business.

The Fuel Division mainly sells gasoline and diesel through owned or leased retail service stations. Until last year, the prices of these products were regulated in Mexico by a government agency named Comisión Reguladora de Energía (Energy Regulatory Commission). Starting in 2017, fuel prices are gradually beginning to follow the dynamics of the international fuel market, in accordance with the regulatory framework, which may also adversely affect the financial situation, operation results and prospects of the Fuel Division’s business.

The Fuel Division’s performance may be affected by changes in commercial terms with suppliers, or disruptions to the industry supply chain

The Fuel Division mainly purchases gasoline and diesel for its operations in Mexico. The fuel market in Mexico is currently undergoing structural changes that should gradually increase the number of suppliers as well as liberalize retail prices to consumers. As the industry evolves, commercial terms for the Fuel Division could deteriorate in the future, and potential disruptions to the order of the supply chain to our gas stations could adversely impact the financial performance and prospects of the Fuel Division.

The Fuel Division’s business could be affected by new safety and environmental regulations enforced by government, global environmental regulations and new energy technologies.

Federal, state and municipal laws and regulations for the installation and operation of service stations are becoming more stringent. Compliance with these laws and regulations is often difficult and costly. Global trends to reduce the consumption of fossil fuels through incentives and taxes could push sales of these fuels at service stations to slow or decrease in the future and automotive technologies, including efficiency gains in traditional fuel vehicles and increased popularity of alternative fuel vehicles, such as electric and liquefied petroleum gas (LPG) vehicles, have caused a significant reduction in fuel consumption globally. Other new technologies could further reduce the sale of traditional fuels, all of which could adversely affect operation results and financial situation of the Fuel Division.

Risks Related to Mexico and the Other Countries Where We Operate

Adverse economic conditions in Mexico may adversely affect our financial position and results.

We are a Mexican corporation and our Mexican operations are our single most important geographic territory. For the year ended December 31, 2016, 64% of our consolidated total revenues were attributable to Mexico. During 2013, 2014 and 2015 the Mexican gross domestic product, or GDP, increased by approximately 1.4%, 2.3% and 2.6%, respectively, and in 2016 it increased by approximately 2.3% on an annualized basis compared to 2015, due to stronger performance in the services and primary sectors, which were partially offset by lower volumes in the oil and gas industries. We cannot assure that such conditions will not slow down in the future or will not have a material adverse effect on our business, financial condition, results of operations and prospects going forward. The Mexican economy continues to be heavily influenced by the U.S. economy, and therefore, deterioration in economic conditions in, or delays in the recovery of, the U.S. economy may hinder any recovery in Mexico. In the past, Mexico has experienced both prolonged periods of weak economic conditions and deteriorations in economic conditions that have had a negative impact on our results.

Our business may be significantly affected by the general condition of the Mexican economy, or by the rate of inflation in Mexico, interest rates in Mexico and exchange rates for, or exchange controls affecting, the Mexican peso. Decreases in the growth rate of the Mexican economy, periods of negative growth and/or increases in inflation or interest rates may result in lower demand for our products, lower real pricing of our products or a shift to lower margin products. Because a large percentage of our costs and expenses are fixed we may not be able to reduce costs and expenses upon the occurrence of any of these events and our profit margins may suffer as a result.

 

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In addition, an increase in interest rates in Mexico would increase the cost of our debt and would cause an adverse effect on our financial position and results. Mexican peso-denominated debt (including currency hedges) constituted 36.4% of our total debt as of December 31, 2016.

Depreciation of the Mexican peso and of our other local currencies relative to the U.S. dollar could adversely affect our financial position and results.

Depreciation of the Mexican peso and of our other local currencies relative to the U.S. dollar increases the cost of a portion of the raw materials we acquire, the price of which is paid in or determined with reference to U.S. dollars, and of our debt obligations denominated in U.S. dollars, and thereby negatively affects our financial position and results. A severe devaluation or depreciation of the Mexican peso may result in disruption of the international foreign exchange markets and may limit our ability to transfer or to convert Mexican pesos into U.S. dollars and other currencies for the purpose of making timely payments of interest and principal on our U.S. dollar-denominated debt or obligations in other currencies. The Mexican peso is a free-floating currency and as such, it experiences exchange rate fluctuations relative to the U.S. dollar over time. During 2016, the Mexican peso depreciated relative to the U.S. dollar by approximately 19.9% compared to 2015. During 2015, 2014 and 2013, the Mexican peso experienced fluctuations relative to the U.S. dollar consisting of 16.6% of depreciation, 12.6% of depreciation and 1.0% of depreciation respectively, compared to the years of 2014, 2013 and 2012. Through April 12, 2017, the Mexican peso has appreciated 9.0% since December 31, 2016.

While the Mexican government does not currently restrict, and since 1982 has not restricted, the right or ability of Mexican or foreign persons or entities to convert Mexican pesos into U.S. dollars or to transfer other currencies out of Mexico, the Mexican government could impose restrictive exchange rate policies in the future, as it has done in the past. Currency fluctuations may have an adverse effect on our financial position, results and cash flows in future periods.

When the financial markets are volatile, as they have been in recent periods, our results may be substantially affected by variations in exchange rates and commodity prices, and to a lesser degree, interest rates. These effects include foreign exchange gain and loss on assets and liabilities denominated in U.S. dollars, fair value gain and loss on derivative financial instruments, commodities prices and changes in interest income and interest expense. These effects can be much more volatile than our operating performance and our operating cash flows.

Political events in Mexico could adversely affect our operations.

Mexican political events may significantly affect our operations. The most recent presidential and congressional elections took place in July 2012 and 2015, respectively. Enrique Peña Nieto, a member of the Institutional Revolutionary Party ( Partido Revolucionario Institucional or PRI), was elected President of Mexico and took office on December 1, 2012. Mexico’s next presidential election will be in July 2018. The Mexican president strongly influences new policies and governmental actions regarding the Mexican economy, and the new administration could implement substantial changes in law, policy and regulations in Mexico, which could negatively affect our business, financial condition, results of operations and prospects. In response to these actions, opponents of the administration could react with, among other things, riots, protests and looting that could negatively affect our operations. For example, the Mexican Congress has approved a number of structural reforms intended to modernize certain sectors of and foster growth in the Mexican economy, which continue to face implementation challenges.

Furthermore, no single party has a majority in the Senate or the Cámara de Diputados (House of Representatives), and the absence of a clear majority by a single party could result in government gridlock and political uncertainty on further reforms and secondary legislation to modernize key sectors of the Mexican economy. Mexico’s next federal legislative election will be in July 2018. We cannot provide any assurances that political developments in Mexico, over which we have no control, will not have an adverse effect on our business, financial condition, results of operations and prospects.

Economic, political and social conditions in other countries may adversely affect our results.

Many countries worldwide, including Mexico, have suffered significant economic, political and social volatility recently, and this may occur again in the future. Global instability has been caused by many different factors, including substantial fluctuations in economic growth, high levels of inflation, changes in currency values, changes in governmental economic or tax policies and regulations, and overall political, social and economic instability. We cannot assure you that such conditions will not return or that such conditions will not have a material adverse effect on our financial situation and results.

 

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The Mexican economy and the market value of securities issued by Mexican issuers may be, to varying degrees, affected by economic and market conditions in other emerging market countries and in the United States. Furthermore, economic conditions in Mexico are highly correlated with economic conditions in the United States as a result of the North American Free Trade Agreement (“NAFTA”), and increased economic activity between the two countries. In November 2016, presidential elections took place in the United States that resulted in a change of the nation’s leadership. President Donald Trump has made public his intention to terminate or re-negotiate the terms of NAFTA, but the content of any potential revisions has not been specified. Furthermore, President Donald Trump has stated that if Canada and Mexico do not agree to re-negotiate the pact, the United States may withdraw from NAFTA. In addition, President Donald Trump has repeatedly announced during his campaign his plan to build a wall along the U.S.-Mexico border in order to stop immigrants from coming into the United States illegally, which may create frictions among the Mexican government and the U.S. government and reduce economic activity between those countries, thus affecting the travel of visitors from Mexico to the United States. However, there can be no assurance as to what a new U.S. administration will do, and the impact of these measures or any others adopted by the new U.S. administration cannot be predicted.

Adverse economic conditions in the United States, the termination or re-negotiation of NAFTA in North America or other related events could have an adverse effect on the Mexican economy. Although economic conditions in other emerging market countries and in the United States may differ significantly from economic conditions in Mexico, investors’ reactions to developments in other countries may have an adverse effect on the market value of securities of Mexican issuers or of Mexican assets. There can be no assurance that future developments in other emerging market countries and in the United States, over which we have no control, will not have a material adverse effect on our financial situation and results.

Technology and cyber-security risks.

We use information systems to operate our business, to process financial information and results of operations for internal reporting purposes and to comply with regulatory financial reporting and legal and tax requirements. Because information systems are critical to many of the our operating activities, our business may be impacted by system shutdowns, service disruptions or security breaches, such as failures during routine operations, network or hardware failures, malicious or disruptive software, unintentional or malicious actions of employees or contractors, cyber-attacks by common hackers, criminal groups or nation-state organizations or social-activist (hacktivist) organizations, natural disasters, failures or impairments of telecommunication networks, or other catastrophic events. Such incidents could result in unauthorized disclosure of material confidential information and we could experience delays in reporting our financial results. In addition, misuse, leakage or falsification of information could result in violations of data privacy laws and regulations, damage our reputation and credibility and, therefore, could have a material adverse effect on our financial situation and results, or may require us to spend significant financial and other resources to remedy the damage caused by a security breach or to repair or replace networks and information systems.

Security risks in Mexico could increase, and this could adversely affect our results.

The presence of violence among drug cartels, and between these and the Mexican law enforcement and armed forces, pose a risk to our business. These incidents are relatively concentrated along the northern Mexican border, as well as in certain other Mexican states such as Sinaloa, Morelos, Michoacan and Guerrero. The north of Mexico is an important region for our retail operations, and an increase in crime rates could negatively affect our sales and customer traffic, increase our security expenses, and result in higher turnover of personnel or damage to the perception of our brands. This situation could worsen and adversely impact our business and financial results because consumer habits and patterns adjust to the increased perceived and real security risks, as people refrain from going out as much and gradually shift some on-premise consumption to off-premise consumption of food and beverages on certain social occasions.

Depreciation of local currencies in other Latin American countries where we operate may adversely affect our financial position.

The devaluation of the local currencies against the U.S. dollar in our non-Mexican territories can increase our operating costs in these countries, and depreciation of the local currencies against the Mexican peso can negatively affect the translation of our results for these countries. In recent years, the Venezuelan currency has been volatile against the Mexican peso. During 2016, in addition to the Venezuelan currency, the currency of Argentina also depreciated against the Mexican peso. Future currency devaluation or the imposition of exchange controls in any of these countries, or in Mexico, would have an adverse effect on our financial position and results.

 

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We have operated under exchange controls in Venezuela since 2003, which limit our ability to remit dividends abroad or make payments other than in local currency and that may increase the real price paid for raw materials and services purchased in local currency. Prior to 2014, we had historically used the official exchange rate in our Venezuelan operations. Commencing in 2014, the Venezuelan government announced a series of changes to the Venezuelan exchange control regime allowing the use of alternative exchanges rates in addition to the official exchange rate.

In January 2014, the Venezuelan government announced an exchange rate determined by the state-run system known as the Sistema Complementario de Administración de Divisas , or SICAD. In March 2014, the Venezuelan government announced a new law that authorized an alternative method of exchanging Venezuelan bolivars to U.S. dollars known as SICAD II. In February 2015, the Venezuelan government announced that it was replacing SICAD II with a new market-based exchange rate determined by the system known as the Sistema Marginal de Divisas , or SIMADI. In February 2016, the Venezuelan government announced a 37% devaluation of the official exchange rate and changed the existing three-tier exchange rate system into a dual system by combining the official exchange rate and the SICAD exchange rate into a single official exchange rate and maintaining the SIMADI exchange rate.

In March 2016, the Venezuelan government announced that it was replacing the SIMADI exchange rate with a new market-based exchange rate known as Divisas Complementarias , or DICOM, and the official exchange rate with a preferential exchange rate denominated Divisa Protegida , or DIPRO. The DIPRO exchange rate is determined by the Venezuelan government and may be used to settle imports of a list of goods and raw materials. The DICOM exchange rate is determined based on supply and demand of U.S. dollars. As of April 14, 2017, the DIPRO and DICOM exchange rates were 10 bolivars and 713.96 bolivars per U.S. dollar, respectively. See Note 3.3 (a) to our audited consolidated financial statements.

We translated our results of operations in Venezuela for the full year ended December 31, 2016 into our reporting currency, the Mexican peso, using the DICOM exchange rate of 673.76 bolivars per US$1.00, which was the exchange rate in effect as of such date. As a result, in 2016, we recognized a reduction in equity of Ps. 2,286 million. Since 2014, Coca-Cola FEMSA has recognized a reduction in equity in an aggregate amount of Ps. 20,230 million. Coca-Cola FEMSA will closely monitor any further developments that may affect the exchange rates to translate the financial statements of its Venezuelan subsidiary in the future.

Based on our facts and circumstances, we anticipate continuing to use the DICOM exchange rate to translate our future results of operations in Venezuela into our reporting currency, the Mexican peso. The Venezuelan government may announce further changes to the exchange rate system in the future. To the extent a higher exchange rate is applied to our investment in Venezuela in future periods as a result of changes to existing regulations, subsequently adopted regulations or otherwise, our results of operations in Venezuela and our financial condition would be further adversely affected. We will closely monitor any further developments in Venezuela, which may affect the exchange rates used by us to translate the results of our Venezuelan subsidiary in the future. More generally, future currency devaluations or the imposition of exchange controls in any of the countries where we operate may potentially increase our operating costs, which could have an adverse effect on our financial position and results of operations.

Risks Related to Our Holding of Heineken N.V. and Heineken Holding N.V. Shares

FEMSA does not control Heineken N.V.’s and Heineken Holding N.V.’s decisions.

On April 30, 2010, FEMSA announced the closing of the transaction pursuant to which FEMSA agreed to exchange 100% of its beer operations for a 20% economic interest in Heineken N.V. and Heineken Holding N.V. (which, together with their respective subsidiaries, we refer to as Heineken or the Heineken Group). As a consequence of this transaction, which we refer to as the Heineken transaction, FEMSA participates in the Heineken Holding N.V. Board of Directors, which we refer to as the Heineken Holding Board, and in the Heineken N.V. Supervisory Board, which we refer to as the Heineken Supervisory Board. However, FEMSA is not a majority or controlling shareholder of Heineken N.V. or Heineken Holding N.V., nor does it control the decisions of the Heineken Holding Board or the Heineken Supervisory Board. Therefore, the decisions made by the majority or controlling shareholders of Heineken N.V. or Heineken Holding N.V. or the Heineken Holding Board or the Heineken Supervisory Board may not be consistent with or may not consider the interests of FEMSA’s shareholders or may be adverse to the interests of FEMSA’s shareholders. Additionally, FEMSA has agreed not to disclose non-public information and decisions taken by Heineken.

 

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Heineken operates in a large number of countries.

Heineken is a global brewer and distributor of beer in a large number of countries. Because of FEMSA’s investment in Heineken, FEMSA shareholders are indirectly exposed to the political, economic and social circumstances affecting the markets in which Heineken is present, which may have an adverse effect on the value of FEMSA’s interest in Heineken, and, consequently, the value of FEMSA shares.

The Mexican peso may strengthen compared to the Euro.

In the event of a depreciation of the euro against the Mexican peso, the fair value of FEMSA’s investment in Heineken’s shares will be adversely affected. Furthermore, the cash flow that is expected to be received in the form of dividends from Heineken will be in euros, and therefore, in the event of a depreciation of the euro against the Mexican peso, the amount of expected cash flow will be adversely affected.

Heineken N.V. and Heineken Holding N.V. are publicly listed companies.

Heineken N.V. and Heineken Holding N.V. are listed companies whose stock trades publicly and is subject to market fluctuation. A reduction in the price of Heineken N.V. or Heineken Holding N.V. shares would result in a reduction in the economic value of FEMSA’s participation in Heineken.

Risks Related to Our Principal Shareholders and Capital Structure

A majority of our voting shares are held by a voting trust, which effectively controls the management of our company, and the interests of which may differ from those of other shareholders.

As of March 16, 2017, a voting trust owned 38.69% of our capital stock and 74.86% of our capital stock with full voting rights, consisting of Series B Shares. Consequently, the voting trust has the power to elect a majority of the members of our board of directors and to play a significant or controlling role in the outcome of substantially all matters to be decided by our board of directors or our shareholders. The interests of the voting trust may differ from those of our other shareholders. See “Item 7. Major Shareholders and Related-Party Transactions” and “Item 10. Additional Information—Bylaws—Voting Rights and Certain Minority Rights.”

Holders of Series D-B and D-L Shares have limited voting rights.

Holders of Series D-B and D-L Shares have limited voting rights and are only entitled to vote on specific matters, such as certain changes in the form of our corporate organization, dissolution, or liquidation, a merger with a company with a distinct corporate purpose, a merger in which we are not the surviving entity, a change of our jurisdiction of incorporation, the cancellation of the registration of the Series D-B and D-L Shares and any other matters that expressly require approval from such holders under the Mexican Securities Law. As a result of these limited voting rights, Series D-B and D-L holders will not be able to influence our business or operations. See “Item 7. Major Shareholders and Related-Party Transactions—Major Shareholders” and “Item 10. Additional Information—Bylaws—Voting Rights and Certain Minority Rights.”

Holders of ADSs may not be able to vote at our shareholder meetings.

Our shares are traded on the New York Stock Exchange, or NYSE, in the form of ADSs. We cannot assure that holders of our shares in the form of ADSs will receive notice of shareholders’ meetings from our ADS depositary in sufficient time to enable such holders to return voting instructions to the ADS depositary in a timely manner. In the event that instructions are not received with respect to any shares underlying ADSs, the ADS depositary will, subject to certain limitations, grant a proxy to a person designated by us in respect of these shares. In the event that this proxy is not granted, the ADS depositary will vote these shares in the same manner as the majority of the shares of each class for which voting instructions are received.

 

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Holders of BD Units in the United States and holders of ADSs may not be able to participate in any future preemptive rights offering and as a result may be subject to dilution of their equity interests.

Under applicable Mexican law, if we issue new shares for cash as a part of a capital increase, other than in connection with a public offering of newly issued shares or treasury stock, we are generally required to grant our shareholders the right to purchase a sufficient number of shares to maintain their existing ownership percentage. Rights to purchase shares in these circumstances are known as preemptive rights. By law, we may not allow holders of our shares or ADSs who are located in the United States to exercise any preemptive rights in any future capital increases unless (1) we file a registration statement with the U.S. Securities and Exchange Commission, which we refer to as the SEC, with respect to that future issuance of shares or (2) the offering qualifies for an exemption from the registration requirements of the U.S. Securities Act of 1933. At the time of any future capital increase, we will evaluate the costs and potential liabilities associated with filing a registration statement with the SEC, as well as the benefits of preemptive rights to holders of our shares in the form of ADSs in the United States and any other factors that we consider important in determining whether to file a registration statement.

We may decide not to file a registration statement with the SEC to allow holders of our shares or ADSs who are located in the United States to participate in a preemptive rights offering. In addition, under current Mexican law, the sale by the ADS depositary of preemptive rights and the distribution of the proceeds from such sales to the holders of our shares in the form of ADSs is not possible. As a result, the equity interest of holders of our shares in the form of ADSs would be diluted proportionately. See “Item 10. Additional Information—Bylaws—Preemptive Rights.”

The protections afforded to minority shareholders in Mexico are different from those afforded to minority shareholders in the United States.

Under Mexican law, the protections afforded to minority shareholders are different from, and may be less than, those afforded to minority shareholders in the United States. Mexican laws do not provide a remedy to shareholders relating to violations of fiduciary duties. There is no procedure for class actions as such actions are conducted in the United States and there are different procedural requirements for bringing shareholder lawsuits against directors for the benefit of companies. Therefore, it may be more difficult for minority shareholders to enforce their rights against us, our directors or our controlling shareholders than it would be for minority shareholders of a United States company.

Investors may experience difficulties in enforcing civil liabilities against us or our directors, officers and controlling persons.

FEMSA is organized under the laws of Mexico, and most of our directors, officers and controlling persons reside outside the United States. In addition, nearly all or a substantial portion of our assets and the assets of our subsidiaries are located outside the United States. As a result, it may be difficult for investors to effect service of process within the United States on such persons or to enforce judgments against them, including any action based on civil liabilities under the U.S. federal securities laws. There is doubt as to the enforceability against such persons in Mexico, whether in original actions or in actions to enforce judgments of U.S. courts, of liabilities based solely on the U.S. federal securities laws.

Developments in other countries may adversely affect the market for our securities.

The market value of securities of Mexican companies is, to varying degrees, influenced by economic and securities market conditions in other emerging market countries. Although economic conditions are different in each country, investors’ reaction to developments in one country can have effects on the securities of issuers in other countries, including Mexico. We cannot assure you that events elsewhere, especially in emerging markets, will not adversely affect the market value of our securities.

 

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The failure or inability of our subsidiaries to pay dividends or other distributions to us may adversely affect us and our ability to pay dividends to holders of ADSs.

We are a holding company. Accordingly, our cash flows are principally derived from dividends, interest and other distributions made to us by our subsidiaries. Currently, our subsidiaries do not have contractual obligations that require them to pay dividends to us. In addition, debt and other contractual obligations of our subsidiaries may in the future impose restrictions on our subsidiaries’ ability to make dividend or other payments to us, which in turn may adversely affect our ability to pay dividends to shareholders and meet our debt and other obligations. As of March 31, 2017, we had no restrictions on our ability to pay dividends. Further, our non-controlling shareholder position in Heineken means that we will be unable to require payment of dividends with respect to the Heineken shares.

 

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ITEM 4. INFORMATION ON THE COMPANY

The Company

Overview

We are a Mexican company headquartered in Monterrey, Mexico, and our origin dates back to 1890. Our company was incorporated on May 30, 1936 and has a duration of 99 years. The duration can be extended indefinitely by resolution of our shareholders. Our legal name is Fomento Económico Mexicano, S.A.B. de C.V., and in commercial and business contexts we frequently refer to ourselves as FEMSA. Our principal headquarters are located at General Anaya No. 601 Pte., Colonia Bella Vista, Monterrey, Nuevo León 64410, Mexico. Our telephone number at this location is (+52-81) 8328-6000. Our website is www.femsa.com. We are organized as a sociedad anónima bursátil de capital variable under the laws of Mexico.

We conduct our operations through the following principal holding companies:

 

   

Coca-Cola FEMSA, which produces, distributes and sells beverages and is the largest franchise bottler of Coca-Cola products in the world by volume;

 

   

FEMSA Comercio, comprising the Retail Division operating various small-format chain stores, including OXXO, the largest and fastest-growing chain in the Americas by number of stores; the Health Division, which includes drugstores and related operations; and the Fuel Division operating the OXXO GAS chain of retail service stations for fuels, motor oils and other car care products. As of December 31, 2016 and 2015, the Health Division and the Fuel Division, respectively, are treated as separate business segments; and

 

   

CB Equity, which holds our investment in Heineken, one of the world’s leading brewers, with operations in over 70 countries.

Corporate Background

FEMSA traces its origins to the establishment of Mexico’s first brewery, Cervecería Cuauhtémoc, S.A., which was founded in 1890 by four Monterrey businessmen: Francisco G. Sada, José A. Muguerza, Isaac Garza and José M. Schneider. Descendants of certain of the founders of Cervecería Cuauhtémoc, S.A. are participants of the voting trust that controls the management of our company.

The strategic integration of the company dates back to 1936 when its packaging operations were established to supply crown caps to the brewery. During this period, these operations were part of what was known as the Monterrey Group, which also included interests in banking and steel businesses and other packaging operations.

In 1974, the Monterrey Group was split between two branches of the descendants of the founding families of Cervecería Cuauhtémoc, S.A. The steel and other packaging operations formed the basis for the creation of Corporación Siderúrgica, S.A. (now Alfa, S.A.B. de C.V.), controlled by the Garza Sada family, and the beverage and banking operations were consolidated under the Valores Industriales, S.A. de C.V. (the corporate predecessor of FEMSA) corporate umbrella controlled by the Garza Lagüera family. FEMSA’s shares were first listed on what is now the Bolsa Mexicana de Valores, S.A.B. de C.V. (which we refer to as the Mexican Stock Exchange) on September 19, 1978. Between the decades of 1970 and 1980, FEMSA diversified its operations through acquisitions in the soft drinks and mineral water industries, the establishment of the first stores under the trade name OXXO and other investments in the hotel, construction, auto parts, food and fishing industries, which were considered non-core businesses and were subsequently divested.

In the 1990s, we began a series of strategic transactions to strengthen the competitive positions of our operating subsidiaries. These transactions included the sale of a 30% strategic interest in Coca-Cola FEMSA to a wholly-owned subsidiary of The Coca-Cola Company and a subsequent public offering of Coca-Cola FEMSA shares, both of which occurred in 1993. Coca-Cola FEMSA listed its L shares on the Mexican Stock Exchange and, in the form of American Depositary Shares, or ADSs, on the New York Stock Exchange, or NYSE.

 

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In 1998, we completed a reorganization that changed our capital structure by converting our outstanding capital stock at the time of the reorganization into BD Units and B Units, and united the shareholders of FEMSA and the former shareholders of Grupo Industrial Emprex, S.A. de C.V. (which we refer to as Emprex) at the same corporate level through an exchange offer that was consummated on May 11, 1998. As part of the reorganization, FEMSA listed ADSs on the NYSE representing BD Units, and listed the BD Units and its B Units on the Mexican Stock Exchange.

In May 2003, our subsidiary Coca-Cola FEMSA expanded its operations throughout Latin America by acquiring 100% of Panamerican Beverages, Inc. (which we refer to as Panamco), then the largest soft drink bottler in Latin America in terms of sales volume in 2002. Through its acquisition of Panamco, Coca-Cola FEMSA began producing and distributing Coca-Cola trademark beverages in additional territories in Mexico, Central America, Colombia, Venezuela and Brazil, along with bottled water, beer and other beverages in some of these territories.

In April 2008, FEMSA shareholders approved a proposal to amend our bylaws in order to preserve the unit structure for our shares that has been in place since May 1998, and to maintain our existing share structure beyond May 11, 2008. Our bylaws previously provided that on May 11, 2008 our Series D-B Shares would convert into Series B Shares and our Series D-L Shares would convert into Series L Shares with limited voting rights. In addition, our bylaws provided that, on May 11, 2008, our current unit structure would cease to exist and each of our B Units would be unbundled into five Series B Shares, while each BD Unit would unbundle into three Series B Shares and two newly issued Series L Shares. Following the April 22, 2008 shareholder approvals, the automatic conversion of our share and unit structures no longer exist, and, absent shareholder action, our share structure will continue to be composed of Series B Shares, which must represent not less than 51% of our outstanding capital stock, and Series D-B and Series D-L Shares, which together may represent up to 49% of our outstanding capital stock. Our Unit structure, absent shareholder action, will continue to consist of B Units, which bundle five Series B Shares, and BD Units, which bundle one Series B Share, two Series D-B Shares and two Series D-L Shares. See “Item 9. The Offer and Listing—Description of Securities.”

In January 2010, FEMSA announced that its board of directors unanimously approved a definitive agreement under which FEMSA would exchange its brewery business of Cuauhtémoc Moctezuma for a 20% economic interest in the Heineken Group, one of the world’s leading brewers. In April 2010, FEMSA announced the closing of the transaction, after Heineken N.V., Heineken Holding N.V. and FEMSA approved the transaction. Under the terms of the agreement, FEMSA received 43,018,320 shares of Heineken Holding N.V. and 43,009,699 shares of Heineken N.V., with an additional 29,172,504 shares of Heineken N.V. (which shares we refer to as the Allotted Shares) delivered pursuant to an allotted share delivery instrument, or the ASDI, with the final installment delivered in October 2011. As of December 31, 2016, FEMSA’s interest in Heineken N.V. represented 12.53% of Heineken N.V.’s outstanding capital and 14.94% of Heineken Holding N.V.’s outstanding capital, resulting in our 20% economic interest in the Heineken Group. The principal terms of the Heineken transaction documents are summarized below in “ Item 10. Additional Information—Material Contracts.”

In January 2013, Coca-Cola FEMSA acquired a 51.0% non-controlling majority stake in KOF Philippines from The Coca-Cola Company. Since January 25, 2017, Coca-Cola FEMSA controls KOF Philippines as all decisions relating to the day-to-day operation and management of KOF Philippines’s business, including its annual normal operations plan, are approved by a majority of its board of directors without requiring the affirmative vote of any director appointed by The Coca-Cola Company.

In May 2013, FEMSA Comercio through one of its subsidiaries, Cadena Comercial de Farmacias, S.A.P.I. de C.V. (which we refer to as CCF), closed the acquisition of Farmacias YZA, a leading drugstore operator in Southeast Mexico, headquartered in Merida, Yucatan. The founding shareholders of Farmacias YZA hold a 25% stake in CCF. In a separate transaction, on May 13, 2013, CCF acquired Farmacias FM Moderna, a leading drugstore operator in the western state of Sinaloa.

 

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In March 2015, following changes to the legal framework resulting from the adoption of Mexico’s energy reform, FEMSA Comercio began to acquire service station franchises of Petroleos Mexicanos (“PEMEX”) and obtain permits from PEMEX to operate such service stations as franchisee. These acquisitions started taking place after two decades (1995-2015) of FEMSA Comercio providing operation services to retail service stations for fuels, motor oils and other car care products through agreements with third parties that owned PEMEX franchises.

In June 2015, CCF acquired 100% of Farmacias Farmacon, a regional pharmacy chain consisting at that time of more than 200 stores in the northwestern Mexican states of Sinaloa, Sonora, Baja California and Baja California Sur.

In September 2015, FEMSA Comercio acquired 60% of Group Socofar, a leading South American drugstore operator based in Santiago, Chile. Socofar operated at that time, directly and through franchises, more than 600 drugstores and 150 beauty stores throughout Chile and over 150 drugstores throughout Colombia. FEMSA Comercio has the right to appoint the majority of the members of Socofar’s board of directors and exercises day- to-day operating control over Socofar. As part of the shareholders agreement entered into with the former controlling shareholder, such minority shareholder has the right to appoint two members of the board of directors of Socofar.

In 2016, FEMSA Comercio, through its subsidiary Cadena Comercial USA Corporation, LLC. (“Cadena Comercial USA”), completed the acquisition of an 80% economic stake in Specialty’s Café & Bakery, Inc (“Specialty’s”), which operates café restaurants in the states of California, Washington and Illinois. In January 2017, Cadena Comercial USA completed the acquisition of the remaining 20% economic stake in Specialty’s becoming its sole owner.

In June 2016, FEMSA Comercio acquired Comercial Big John Limitada (“Big John”), a leading convenience store operator based in Santiago, Chile. At the time of the acquisition, Big John operated 49 stores, mainly in the Santiago metropolitan area.

For more information on FEMSA Comercio’s recent transactions, see “Item 4. Information on the Company—FEMSA Comercio – Corporate History”.

In December 2016, Coca-Cola FEMSA acquired Vonpar, a Brazilian bottler of Coca-Cola trademark products, one of the largest privately owned bottlers in the Brazilian Coca-Cola system.

For more information on Coca-Cola FEMSA’s recent transactions, see “Item 4. Information on the Company—Coca-Cola FEMSA – Corporate History”.

 

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Ownership Structure

We conduct our business through our principal sub-holding companies as shown in the following diagram and table:

Principal Sub-holding Companies—Ownership Structure

As of March 31, 2017

 

LOGO

 

(1) Compañía Internacional de Bebidas, S.A. de C.V., which we refer to as CIBSA.
(2) Percentage of issued and outstanding capital stock owned by CIBSA (63% of Coca-Cola FEMSA’s capital stock with full voting rights). See “Item 4. Information on the Company – Coca-Cola FEMSA – Capital Stock.”
(3) Ownership in CB Equity held through various FEMSA subsidiaries.
(4) Combined economic interest in Heineken N.V. and Heineken Holding N.V.
(5) Includes the Retail Division, the Health Division and the Fuel Division.

The following table presents an overview of our operations by reportable segment and by geographic area:

Operations by Segment—Overview

Year Ended December 31, 2016 and % of growth (decrease) vs. previous year

 

     Coca-Cola FEMSA     Retail Division     Health Division (4)  (5)     Fuel Division     CB  Equity (1)  
     (in millions of Mexican pesos, except for employees and percentages)  
Total revenues    Ps. 177,718        17   Ps. 137,139        14   Ps. 43,411        233   Ps. 28,616        55   Ps. —          NA  
Gross Profit      79,662        11     50,990        17     12,738        245     2,248        58     —          NA  
Share of the profit (loss) of associates and joint ventures accounted for using the equity method, net of taxes      147        (5 )% (2)       15        250 % (3)       —          NA       —          NA       6,342        8
Total assets      279,256        33     59,740        34     35,862        59     3,649        13     108,976        14
Employees      85,145        2     125,166        10     21,246        6     5,359        18     —          NA  

 

(1) CB Equity holds our Heineken N.V. and Heineken Holding N.V. shares.
(2) Reflects the percentage decrease between the gain of Ps. 147 million recorded in 2016 and the gain of Ps. 155 million recorded in 2015.
(3) Reflects the percentage increase between the gain of Ps. 15 million recorded in 2016 and the loss of Ps. 10 million recorded in 2015.
(4) The operations that compose the Health Division have been treated as a separate reportable segment since 2016.
(5) Total revenues, gross profit and total assets include the Group Socofar’s operations recorded since October 2015.

 

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Total Revenues Summary by Segment (1)

 

     Year Ended December 31, 2016  
     2016      2015      2014  
     (in millions of Mexican pesos)  

Coca-Cola FEMSA

   Ps. 177,718      Ps. 152,360      Ps. 147,298  

FEMSA Comercio

        

Retail Division

     137,139        119,884        109,624  

Health Division

     43,411        13,053        —    

Fuel Division

     28,616        18,510        —    

Other

     29,491        22,774        20,069  

Consolidated total revenues

   Ps. 399,507      Ps. 311,589      Ps. 263,449  

 

(1) The sum of the financial data for each of our segments differs from our consolidated financial information due to intercompany transactions, which are eliminated in consolidation, and certain assets and activities of FEMSA.

Total Revenues Summary by Geographic Area (1)

 

     Year Ended December 31, 2016  
     2016      2015      2014  
     (in millions of Mexican pesos)  

Mexico and Central America (2)

   Ps. 267,732      Ps. 228,563      Ps. 186,736  

South America (3)

     113,937        74,928        69,172  

Venezuela

     18,937        8,904        8,835  

Consolidated total revenues

   Ps. 399,507      Ps. 311,589      Ps. 263,449  

 

(1) The sum of the financial data for each geographic area differs from our consolidated financial information due to intercompany transactions, which are eliminated in consolidation.
(2) Central America includes Guatemala, Nicaragua, Costa Rica and Panama. Domestic (Mexico-only) revenues were Ps. 254,643 million, Ps. 218,809 million and Ps. 178,125 for the years ended December 31, 2016, 2015 and 2014, respectively.
(3) South America includes Brazil, Colombia, Argentina and Chile. South America revenues include revenues from our operations in Brazil of Ps. 48,924, Ps. 39,749 million and Ps. 45,799 million; revenues from our operations in Colombia of Ps. 17,027, Ps. 14,283 million and Ps. 14,207 million; revenues from our operations in Argentina of Ps. 12,340 million, Ps. 14,004 million and Ps. 9,714 million for the years ended December 31, 2016, 2015 and 2014, respectively and revenues from our operations in Chile of Ps. 36,631 and 7,586 million for the years ended December 31, 2016 and 2015, respectively.

Significant Subsidiaries

The following table sets forth our significant subsidiaries as of December 31, 2016:

 

Name of Company

   Jurisdiction of
Establishment
   Percentage
Owned
 

CIBSA:

   Mexico      100.0

Coca-Cola FEMSA

   Mexico      47.9 % (1)  

Emprex:

   Mexico      100.0

FEMSA Comercio (2)

   Mexico      100.0

CB Equity (3)

   United Kingdom      100.0

 

(1) Percentage of capital stock. FEMSA, through CIBSA, owns 63% of the shares of Coca-Cola FEMSA with full voting rights.
(2) Includes the Retail Division, the Health Division and the Fuel Division.
(3) Ownership in CB Equity held through various FEMSA subsidiaries. CB Equity holds our Heineken N.V and Heineken Holding N.V. shares.

Business Strategy

We understand the importance of connecting with our end consumers by interpreting their needs, and ultimately delivering the right products to them for the right occasions and the optimal value proposition. We strive to achieve this by developing brand value, expanding our significant distribution capabilities and improving the efficiency of our operations while aiming to reach our full potential. We continue to improve our information gathering and processing systems in order to better know and understand what our consumers want and need, and we are improving our production and distribution by more efficiently leveraging our asset base.

 

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Our objective is to create economic, social and environmental value for our stakeholders—including our employees, our consumers, our shareholders and the enterprises and institutions within our society—now and into the future.

We believe that the competencies that our businesses have developed can be replicated in other geographic regions. This underlying principle guides our consolidation and growth efforts, which have led to our current continental footprint. We operate in Mexico, Central and South America and the Philippines including some of the most populous metropolitan areas in Latin America—which provides us with opportunities to create value through both an improved ability to execute our strategies in complex markets, and the use of superior commercial tools. We have also increased our capabilities to operate and succeed in other geographic regions by improving management skills in order to obtain a precise understanding of local consumer needs. Going forward, we intend to use those capabilities to continue our international expansion of both Coca-Cola FEMSA and FEMSA Comercio, expanding both our geographic footprint and our presence in the non-alcoholic beverage industry and in small box retail formats, as well as taking advantage of potential opportunities across markets to leverage our capability set.

Recent examples include our entry into the drugstore business in Mexico and South America, and into the fuel service station business in Mexico, where we are applying our retail and operational capabilities to develop attractive value propositions for consumers in these formats.

Coca-Cola FEMSA

Overview

Coca-Cola FEMSA is the largest franchise bottler of Coca-Cola trademark beverages in the world by volume. Coca-Cola FEMSA operates in territories in the following countries:

 

   

Mexico—a substantial portion of central Mexico, the southeast and northeast of Mexico (including the Gulf region).

 

   

Central America—Guatemala (Guatemala City and surrounding areas), Nicaragua (nationwide), Costa Rica (nationwide) and Panama (nationwide).

 

   

Colombia—most of the country.

 

   

Venezuela—nationwide.

 

   

Brazil—a major part of the states of Sao Paulo and Minas Gerais, the states of Parana, Santa Catarina and Mato Grosso do Sul and part of the states of Rio de Janeiro, Rio Grande do Sul and Goias.

 

   

Argentina—Buenos Aires and surrounding areas.

 

   

The Philippines—nationwide (through a joint venture with The Coca-Cola Company).

Coca-Cola FEMSA was organized on October 30, 1991 as a stock corporation with variable capital ( sociedad anónima de capital variable ) under the laws of Mexico for a term of 99 years. On December 5, 2006, as required by amendments to the Mexican Securities Market Law, Coca-Cola FEMSA became a publicly traded stock corporation with variable capital ( sociedad anónima bursátil de capital variable ). Coca-Cola FEMSA’s legal name is Coca-Cola FEMSA, S.A.B. de C.V. Coca-Cola FEMSA’s principal executive offices are located at Calle Mario Pani No. 100, Colonia Santa Fe Cuajimalpa, Delegación Cuajimalpa de Morelos, 05348, Ciudad de México, México. Coca-Cola FEMSA’s telephone number at this location is (52-55) 1519-5000. Coca-Cola FEMSA’s website is www.coca-colafemsa.com .

 

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The following is an overview of Coca-Cola FEMSA’s operations by consolidated reporting segment in 2016.

Operations by Consolidated Reporting Segment—Overview

Year Ended December 31, 2016

 

     Total Revenues     Gross Profit  
     (in millions of Mexican pesos, except percentages)  

Mexico and Central America (1)

   Ps. 87,557        49.3   Ps. 43,569        54.7

South America (excluding Venezuela) (2)

     71,293        40.1     29,263        36.7

Venezuela

     18,868        10.6     6,830        8.6
  

 

 

    

 

 

   

 

 

    

 

 

 

Consolidated

   Ps. 177,718        100.0   Ps. 79,662        100.0

 

(1) Includes Mexico, Guatemala, Nicaragua, Costa Rica and Panama.
(2) Includes Colombia, Brazil and Argentina. Includes results of Vonpar from December 2016.

Corporate History

Coca-Cola FEMSA commenced operations in 1979, when one of our subsidiaries acquired certain sparkling beverage bottlers in Mexico City and surrounding areas. In 1991, we transferred our ownership in the bottlers to FEMSA Refrescos, S.A. de C.V., Coca-Cola FEMSA’s corporate predecessor. In June 1993, a subsidiary of The Coca-Cola Company subscribed for 30% of Coca-Cola FEMSA’s capital stock in the form of Series D shares. In September 1993, we sold Series L shares that represented 19.0% of Coca-Cola FEMSA’s capital stock to the public, and Coca-Cola FEMSA listed these shares on the Mexican Stock Exchange and, in the form of ADSs, on the NYSE.

In a series of transactions since 1994, Coca-Cola FEMSA has acquired new territories, brands and other businesses which today comprise its business. In May 2003, Coca-Cola FEMSA acquired Panamerican Beverages Inc., or Panamco, and began producing and distributing Coca-Cola trademark beverages in additional territories in the central and gulf regions of Mexico and in Central America (Guatemala, Nicaragua, Costa Rica and Panama), Colombia, Venezuela and Brazil, along with bottled water, beer and other beverages in some of these territories.

In November 2006, we acquired 148,000,000 of Coca-Cola FEMSA’s Series D shares from certain subsidiaries of The Coca-Cola Company, which increased FEMSA’s ownership to 53.7%.

In November 2007, Coca-Cola FEMSA acquired together with The Coca-Cola Company 100.0% of the shares of capital stock of Jugos del Valle, S.A.P.I. de C.V., or Jugos del Valle. In 2008, Coca-Cola FEMSA, The Coca-Cola Company and all Mexican and Brazilian Coca-Cola bottlers entered into a joint business for the Mexican and Brazilian operations, respectively, of Jugos del Valle.

In December 2007 and May 2008, Coca-Cola FEMSA sold most of its proprietary brands to The Coca-Cola Company. The proprietary brands are now being licensed back to Coca-Cola FEMSA by The Coca-Cola Company pursuant to Coca-Cola FEMSA’s bottler agreements. In May 2008, Coca-Cola FEMSA entered into a transaction with The Coca-Cola Company to acquire its wholly owned bottling franchise Refrigerantes Minas Gerais, Ltda., or REMIL, located in the State of Minas Gerais in Brazil.

In July 2008, Coca-Cola FEMSA acquired the Agua de los Angeles bulk water business in Mexico City and surrounding areas from Grupo Embotellador CIMSA, S.A. de C.V., at the time one of the Coca-Cola bottling franchises in Mexico. The trademarks remain with The Coca-Cola Company. Coca-Cola FEMSA subsequently merged Agua de los Angeles into its bulk water business under the Ciel brand.

In February 2009, Coca-Cola FEMSA acquired together with The Coca-Cola Company the Brisa bottled water business in Colombia from Bavaria, S.A., a subsidiary of SABMiller plc. Coca-Cola FEMSA acquired the production assets and the distribution territory, and The Coca-Cola Company acquired the Brisa brand.

 

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In May 2009, Coca-Cola FEMSA entered into an agreement to manufacture, distribute and sell the Crystal trademark water products in Brazil jointly with The Coca-Cola Company.

In August 2010, Coca-Cola FEMSA acquired from The Coca-Cola Company, along with other Brazilian Coca-Cola bottlers, Leão Alimentos e Bebidas, Ltda., or Leão Alimentos, manufacturer and distributor of the Matte Leão tea brand, which would later be integrated with the Brazilian operations of Jugos del Valle.

In March 2011, Coca-Cola FEMSA acquired together with The Coca-Cola Company, Grupo Industrias Lácteas, S.A. (known as Estrella Azul), a Panamanian conglomerate that participates in the dairy and juice-based beverage categories in Panama.

In October 2011, Coca-Cola FEMSA merged with Grupo Tampico, a Mexican bottler with operations in the states of Tamaulipas, San Luis Potosi, and Veracruz, as well as in parts of the states of Hidalgo, Puebla and Queretaro.

In December 2011, Coca-Cola FEMSA merged with Grupo CIMSA, a Mexican Coca-Cola bottler with operations mainly in the states of Morelos and Mexico, as well as in parts of the states of Guerrero and Michoacan. As part of Coca-Cola FEMSA’s merger with Grupo CIMSA, Coca-Cola FEMSA also acquired a 13.2% equity interest in Promotora Industrial Azucarera, S.A de C.V., or PIASA.

In May 2012, Coca-Cola FEMSA merged with Grupo Fomento Queretano, a Mexican bottler with operations mainly in the state of Queretaro, as well as in parts of the states of Mexico, Hidalgo and Guanajuato. As part of Coca-Cola FEMSA’s merger with Grupo Fomento Queretano, it also acquired an additional 12.9% equity interest in PIASA.

In August 2012, Coca-Cola FEMSA acquired, through Jugos del Valle, an indirect participation in Santa Clara Mercantil de Pachuca, S.A. de C.V., or Santa Clara, a producer of milk and dairy products in Mexico.

In January 2013, Coca-Cola FEMSA acquired a 51.0% non-controlling majority stake in KOF Philippines from The Coca-Cola Company. Since January 25, 2017, Coca-Cola FEMSA controls KOF Philippines as all decisions relating to the day-to-day operation and management of KOF Philippines’s business, including its annual normal operations plan, are approved by a majority of its board of directors without requiring the affirmative vote of any director appointed by The Coca-Cola Company.

In May 2013, Coca-Cola FEMSA merged with Grupo Yoli, a Mexican bottler with operations mainly in the state of Guerrero, as well as in parts of the state of Oaxaca. As part of Coca-Cola FEMSA’s merger with Grupo Yoli, Coca-Cola FEMSA also acquired an additional 10.1% equity interest in PIASA, for a total ownership of 36.4% as of April 7, 2017.

In August 2013, Coca-Cola FEMSA acquired Companhia Fluminense, a franchise that operates in parts of the states of Sao Paulo, Minas Gerais and Rio de Janeiro in Brazil. As part of Coca-Cola FEMSA acquisition of Companhia Fluminense, it also acquired an additional 1.2% equity interest in Leão Alimentos.

In October 2013, Coca-Cola FEMSA acquired Spaipa, a Brazilian bottler with operations in the state of Parana and in parts of the state of Sao Paulo. As part of Coca-Cola FEMSA’s acquisition of Spaipa, it also acquired an additional 5.8% equity interest in Leão Alimentos and a 50.0% stake in Fountain Água Mineral Ltda., a joint venture to develop the water category together with The Coca-Cola Company.

In 2016, Coca-Cola FEMSA entered into certain distribution agreements with Monster Energy Company to sell and distribute Monster trademark energy drinks in most of Coca-Cola FEMSA’s territories. These agreements have a ten-year term and are automatically renewed for up to two five-year terms.

In December 2016, Coca-Cola FEMSA acquired Vonpar, a Brazilian bottler of Coca-Cola trademark products with operations in the states of Rio Grande do Sul and Santa Catarina in Brazil. As part of Coca-Cola FEMSA acquisition of Vonpar, it also acquired an additional 3.36% equity interest in Leão Alimentos, for a total ownership of 27.7% as of April 7, 2017.

 

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In March 2017, Coca-Cola FEMSA acquired, through Jugos del Valle, an indirect participation in the Mexican AdeS soy-based beverage business, through Coca-Cola FEMSA Brazilian and Argentine subsidiaries, an indirect participation in the Brazilian and Argentine AdeS soy-based beverage businesses, and through Coca-Cola FEMSA Colombian subsidiary, a direct participation in the Colombian AdeS soy-based beverage business. As a result of this acquisition, Coca-Cola FEMSA has exclusive distribution rights of AdeS soy-based beverages in these territories.

Capital Stock

As of April 7, 2017, we indirectly owned Series A shares equal to 47.9% of Coca-Cola FEMSA capital stock (63.0% of Coca-Cola FEMSA’s capital stock with full voting rights). As of April 7, 2017, The Coca-Cola Company indirectly owned Series D shares equal to 28.1% of the capital stock of Coca-Cola FEMSA (37.0% of Coca-Cola FEMSA’s capital stock with full voting rights). Series L shares with limited voting rights, which trade on the Mexican Stock Exchange and in the form of ADSs on the NYSE, constitute the remaining 24.0% of Coca-Cola FEMSA’s capital stock.

 

LOGO

Business Strategy

Coca-Cola FEMSA operates with a large geographic footprint in Latin America. Coca-Cola FEMSA has created a more flexible organizational structure to execute its strategies and continue with its track record of growth. Coca-Cola FEMSA has also aligned its business strategies more efficiently, ensuring a faster introduction of new products and categories, and a more rapid and effective design and deployment of commercial models.

To maximize growth and profitability and to create value for our shareholders and customers, Coca-Cola FEMSA plans on executing the following key strategies: (i) continue evolving its commercial and client segmentation models to capture the industry’s long-term value potential; (ii) implement multi-segmentation strategies to target customers by consumption occasion, competitive environment and income level; (iii) implement well-planned product development, packaging, pricing and marketing strategies through different distribution channels; (iv) drive product innovation along its different product categories; (v) develop new businesses and distribution channels; and (vi) drive operational efficiencies throughout its organization to achieve the full operating potential of its commercial models and processes. In furtherance of these efforts, Coca-Cola FEMSA intends to continue to focus on, among other initiatives, the following:

 

   

Working with The Coca-Cola Company to develop a business model to continue exploring and participating in new lines of beverages, extending existing product lines and effectively advertising and marketing our products;

 

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Developing and expanding its still beverage portfolio through innovation, strategic acquisitions and by entering into agreements to acquire companies with The Coca-Cola Company;

 

   

Expanding its bottled water strategy with The Coca-Cola Company through innovation and selective acquisitions to maximize profitability across its market territories;

 

   

Strengthening its selling capabilities and go-to-market strategies, including pre-sale, conventional selling and hybrid routes, in order to get closer to its customers and help them satisfy the beverage needs of consumers;

 

   

Implementing selective packaging strategies designed to increase consumer demand for its products and to build a strong returnable base for the Coca-Cola brand;

 

   

Replicating its best practices throughout the value chain;

 

   

Rationalizing and adapting its organizational and asset structure in order to be in a better position to anticipate and respond to industry changes and trends in a competitive environment;

 

   

Building a multi-cultural collaborative team, from top to bottom; and

 

   

Broadening its geographic footprint through organic growth and strategic joint ventures, mergers and acquisitions.

Coca-Cola FEMSA seeks to increase sales of its products in the territories where it operates. To that end, Coca-Cola FEMSA’s marketing teams continuously develop sales strategies tailored to its different customers across its various territories and distribution channels. Coca-Cola FEMSA continues to develop its product portfolio to better meet market demand and maintain its overall profitability. To stimulate and respond to consumer demand, Coca-Cola FEMSA continues to introduce new categories, products and presentations. See “Item 4. Information on the Company—Coca-Cola FEMSA —Our Products” and “Item 4. Information on the Company—Coca-Cola FEMSA —Packaging” In addition, because Coca-Cola FEMSA views its relationship with The Coca-Cola Company as integral to its business, Coca-Cola FEMSA uses market information systems and strategies developed with The Coca-Cola Company to improve its business and marketing strategies. See “Item 4. Information on the Company—Coca-Cola FEMSA—Marketing.”

Coca-Cola FEMSA also continuously seeks to increase productivity in its facilities through infrastructure and process reengineering for improved asset utilization. Coca-Cola FEMSA’s capital expenditure program includes investments in production and distribution facilities, bottles, cases, coolers and information systems. Coca-Cola FEMSA believes that this program will allow it to maintain its capacity and flexibility to innovate and to anticipate and respond to consumer demand for its products.

In 2015, Coca-Cola FEMSA redesigned its corporate structure to strengthen the core functions at its organization. Through this restructuring Coca-Cola FEMSA created specialized departments (centers of excellence) focused on manufacturing, distribution and logistics, commercial, and IT innovation areas. These departments not only enable centralized collaboration and knowledge sharing, but also drive standards of excellence and best practices in Coca-Cola FEMSA’s key strategic capabilities. Coca-Cola FEMSA’s priorities include enhanced manufacturing efficiency, improved distribution and logistics, and cutting-edge IT-enabled commercial innovation.

As of December 31, 2016, Coca-Cola FEMSA had the following centers of excellence:

 

   

Manufacturing Center of Excellence . This center focuses on developing industry-leading operating models, practices and processes mainly by reducing operating costs, increasing efficiency and productivity of Coca-Cola FEMSA’s manufacturing assets, minimizing waste disposal by optimizing the materials used in Coca-Cola FEMSA’s manufacturing processes, and promoting high industrial quality and product safety.

 

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Distribution and Logistics Center of Excellence . This center seeks to ensure best-in-class customer service by optimizing performance in Coca-Cola FEMSA’s supply chain, transport engineering and equipment design, warehouse management and secondary distribution from Coca-Cola FEMSA’s warehouses to the point of sale.

 

   

Commercial Center of Excellence . This center is designed to develop expertise and promote excellence across key commercial areas. The center establishes and aligns Coca-Cola FEMSA’s commercial views across key functional areas, identifies and replicates best commercial practices and processes, develops and enforces commercial performance standards and drives innovation across Coca-Cola FEMSA’s commercial activities.

 

   

IT Innovation Center of Excellence . This center is established to support Coca-Cola FEMSA’s other centers of excellence by developing a comprehensive technological platform to create and foster innovative processes, technologies and capabilities to centralize information and promote knowledge sharing across Coca-Cola FEMSA’s key strategic areas.

Coca-Cola FEMSA is further accelerating its cultural evolution by creating a unified corporate culture founded on leadership, talent and innovation. Coca-Cola FEMSA focuses on management quality as a key element of its growth strategy and remains committed to fostering the development of quality management at all levels. Coca-Cola FEMSA’s Strategic Talent Management Model is designed to enable Coca-Cola FEMSA to reach its full potential by developing the capabilities of its employees and executives. This holistic model works to build the skills necessary for its employees and executives to reach their maximum potential, while contributing to the achievement of its short- and long-term objectives. To support this capability development model, Coca-Cola FEMSA’s board of directors allocates a portion of its yearly operating budget to fund these management training programs.

Sustainable development is a comprehensive part of Coca-Cola FEMSA’s strategic framework for business operation and growth. Coca-Cola FEMSA bases its efforts in its core foundation, its ethics and values. Coca-Cola FEMSA focuses on three main areas, (i) its people, by encouraging the comprehensive development of its employees and their families; (ii) its communities, by promoting the generation of sustainable communities where it serves, healthy habits, self-care, adequate nutrition and physical activity, and supporting the development of its value chain; and (iii) its planet, by establishing guidelines that Coca-Cola FEMSA believes will result in efficient use of natural resources to minimize the impact that its operations might have on the environment and contributing to creating a broader awareness of caring for its environment through education and community programs.

Coca-Cola FEMSA is conscious that weight issues and obesity are worldwide health problems, which need a collective effort for their solution. Coca-Cola FEMSA believes that neither beverages nor any other product by itself is the direct cause of these problems, as they are complicated issues related to dietary habits, physical activity and education. However, as industry leaders, Coca-Cola FEMSA would like to be a part of the solution. That is why Coca-Cola FEMSA continues to be committed to find, together with public and private institutions of the countries where it operates, a comprehensive solution to this problem. Through innovation, Coca-Cola FEMSA has developed new products and expanded the availability of low or zero calorie beverages as well as bottled water in different presentations, adapted to consumers’ lifestyle. Approximately 36.0% of Coca-Cola FEMSA’s brands are low- or non-caloric beverages. In addition, Coca-Cola FEMSA informs its consumers through front labeling on nutrient composition and caloric content of our beverages. Coca-Cola FEMSA has been a pioneer in the introduction of the Guideline Daily Amounts (GDA), and it performs responsible advertising practices and marketing. Coca-Cola FEMSA voluntarily adheres to national and international codes of conduct in advertising and marketing, including communications targeted to minors which are developed based on the Responsible Marketing policies and Global School Beverage Guidelines of The Coca-Cola Company, achieving full compliance with all such codes in all of the countries where it operates. Moreover, Coca-Cola FEMSA actively promotes exercise, proper nutrition and healthy habits to promote an energetic balance, demonstrating its commitment to encourage physical activity and healthy habits among consumers. As part of the progress towards Coca-Cola FEMSA’s goal of benefiting more than five million people in healthy lifestyle programs from 2015 through 2020, more than 500,000 people in 2015 and approximately one million in 2016 benefited from its healthy activity programs.

Coca-Cola FEMSA pledges to continue working to innovate and implement measures to help people lead active and healthy lifestyles.

 

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KOF Philippines Joint Venture

On January 25, 2013, as part of Coca-Cola FEMSA’s efforts to expand its geographic reach, it acquired a 51.0% non-controlling majority stake in KOF Philippines from The Coca-Cola Company. Coca-Cola FEMSA has an option to acquire the remaining 49.0% stake in KOF Philippines at any time during the seven years following the closing date. Coca-Cola FEMSA also has a put option to sell its ownership in KOF Philippines to The Coca-Cola Company commencing on the fifth anniversary of the closing date and ending on the sixth anniversary of the closing date.

Pursuant to the Coca-Cola FEMSA’s shareholders’ agreement with The Coca-Cola Company, during a four-year period that ended on January 25, 2017, all decisions relating to KOF Philippines were approved jointly with The Coca-Cola Company. Since January 25, 2017, Coca-Cola FEMSA controls KOF Philippines as all decisions relating to the day-to-day operation and management of KOF Philippines’s business, including its annual normal operations plan, are approved by a majority of its board of directors without requiring the affirmative vote of any director appointed by The Coca-Cola Company. The Coca-Cola Company has the right to appoint (and may remove) KOF Philippines’s chief financial officer. Coca-Cola FEMSA has the right to appoint (and may remove) the chief executive officer and all other officers of KOF Philippines. Commencing on February 1, 2017, Coca-Cola FEMSA started consolidating KOF Philippines’s financial results in its financial statements. Coca-Cola FEMSA’s results for the first quarter of 2017 and its future results in 2017 will reflect a reduction in its share of the profit of associates and joint ventures accounted for using the equity method, net of taxes, as a result of this consolidation.

As of December 31, 2016, Coca-Cola FEMSA’s investment under the equity method in KOF Philippines was Ps.11,460 million. KOF Philippines’s product portfolio in the Philippines consists of Coca-Cola trademark beverages and its total sales volume in 2016 reached 569 million unit cases. The operations of KOF Philippines are comprised of 19 production plants and serve close to 846,588 customers.

The Philippines presents significant opportunities for further growth. Coca-Cola has been present in the Philippines since the start of the 20th century and since 1912 it has been locally producing Coca-Cola products. The Philippines received the first Coca-Cola bottling and distribution franchise in Asia. Coca-Cola FEMSA’s strategic framework for growth in the Philippines is based on three pillars: portfolio, route to market and supply chain.

 

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Coca-Cola FEMSA’s Territories

The following map shows Coca-Cola FEMSA’s territories, including KOF Philippines, its joint venture in the Philippines with The Coca-Cola Company, giving estimates in each case of the population to which Coca-Cola FEMSA offers products and the number of retailers of its beverages as of December 31, 2016:

 

LOGO

 

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Coca-Cola FEMSA’s Products

Coca-Cola FEMSA produces, markets, sells and distributes Coca-Cola trademark beverages. The Coca-Cola trademark beverages include: sparkling beverages (colas and flavored sparkling beverages), waters and still beverages (including juice drinks, coffee, teas, milk, value-added dairy and isotonic drinks).

Coca-Cola FEMSA’s most important brand, Coca-Cola , together with its main line extensions, accounted for 60.3% of total sales volume in 2016. Coca-Cola FEMSA’s next largest brands, Ciel (a water brand from Mexico and its line extensions), Fanta (and its line extensions), Del Valle (and its line extensions) and Sprite (and its line extensions) accounted for 11.5%, 4.5%, 4.2% and 2.9%, respectively, of total sales volume in 2016. Coca-Cola FEMSA uses the term line extensions to refer to the different flavors and low-calorie versions in which it offers its brands.

The following table sets forth Coca-Cola FEMSA main products as of December 31, 2016:

 

Colas:

   Mexico and
Central
America (1)
   South
America (2)
   Venezuela

Coca-Cola

        

Coca-Cola Light

        

Coca-Cola Zero

        

Coca-Cola Life

        

Coca-Cola Sin Azúcar

        
Flavored Sparkling Beverages:               

Ameyal

        

Canada Dry

        

Chinotto

        

Crush

        

Escuis

        

Fanta

        

Fresca

        

Frescolita

        

Hit

        

Kist

        

Kuat

        

Lift

        

Limon&Nada

        

Mundet

        

Naranja&Nada

        

Quatro

        

Schweppes

        

Simba

        

Sprite

        

Victoria

        

Yoli

        

Water:

              

Alpina

        

Aquarius (3)

        

Bonaqua

        

Brisa

        

Ciel

        

Crystal

        

Dasani

        

Manantial

        

Nevada

        

 

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Other Categories:

   Mexico and
Central
America (1)
   South
America (2)
   Venezuela

Cepita (4)

        

Del Prado (5)

        

Estrella Azul (6)

        

FUZE Tea

        

Hi-C (7)

        

Santa Clara (8)

        

Jugos del Valle (4)

        

Matte Leão (9)

        

Powerade (10)

        

ValleFrut (11)

        

Monster (12)

        

 

(1) Includes Mexico, Guatemala, Nicaragua, Costa Rica and Panama.
(2) Includes Brazil, Colombia and Argentina.
(3) Flavored water. In Brazil, also a flavored sparkling beverage.
(4) Juice-based beverage.
(5) Juice-based beverage in Central America.
(6) Milk and value-added dairy and juices.
(7) Juice-based beverage. Includes Hi-C Orangeade in Argentina.
(8) Milk, value-added dairy and coffee.
(9) Ready to drink tea.
(10) Isotonic drinks.
(11) Orangeade. Includes Del Valle Fresh in Costa Rica, Nicaragua, Panama, Colombia and Venezuela.
(12) Energy drinks in Mexico, Guatemala, Costa Rica, Panama, Brazil and Colombia.

Packaging

Coca-Cola FEMSA produces, markets, sells and distributes Coca-Cola trademark beverages in each of its territories in containers authorized by The Coca-Cola Company, which consist of a variety of returnable and non-returnable presentations in the form of glass bottles, cans and plastic bottles mainly made of polyethylene terephthalate, which Coca-Cola FEMSA refers to as PET. Coca-Cola FEMSA uses the term presentation to refer to the packaging unit in which it sells its products. Presentation sizes for Coca-Cola FEMSA’s Coca-Cola trademark beverages range from a 6.5-ounce personal size to a 3-liter multiple serving size. For all of Coca-Cola FEMSA’s products excluding water, Coca-Cola FEMSA considers a multiple serving size as equal to, or larger than, 1.0 liter. In general, personal sizes have a higher price per unit case as compared to multiple serving sizes. Coca-Cola FEMSA offers both returnable and non-returnable presentations, which allow it to offer portfolio alternatives based on convenience and affordability to implement revenue management strategies and to target specific distribution channels and population segments in its territories. In addition, Coca-Cola FEMSA sells some Coca-Cola trademark beverage syrups in containers designed for soda fountain use, which Coca-Cola FEMSA refers to as fountain. Coca-Cola FEMSA also sells bottled water products in bulk sizes, which refer to presentations equal to or larger than 5.0 liters, which have a much lower average price per unit case than Coca-Cola FEMSA’s other beverage products.

Sales Volume and Transactions Overview

Coca-Cola FEMSA measures total sales volume in terms of unit cases and number of transactions. “Unit case” refers to 192 ounces of finished beverage product (24 eight-ounce servings) and, when applied to soda fountains, refers to the volume of syrup, powders and concentrate that is required to produce 192 ounces of finished beverage product. “Transactions” refers to the number of single units (e.g. a can or a bottle) sold, regardless of their size or volume or whether they are sold individually or in multipacks, except for fountain which represents multiple transactions based on a standard 12 oz. serving. Except when specifically indicated, “sales volume” in this annual report refers to sales volume in terms of unit cases.

 

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The characteristics of Coca-Cola FEMSA’s territories are very diverse. Central Mexico and Coca-Cola FEMSA’s territories in Argentina are densely populated and have a large number of competing beverage brands as compared to the rest of its territories. Coca-Cola FEMSA’s territories in Brazil are densely populated but have lower consumption of beverage products as compared to Mexico. Portions of southern Mexico, Central America and Colombia are large and mountainous areas with lower population density, lower per capita income and lower consumption of beverages. In Venezuela, Coca-Cola FEMSA faces operational disruptions from time to time and adverse economic conditions have affected per capita income, both of which have had an adverse effect on Coca-Cola FEMSA’s volumes sold.

The following table illustrates Coca-Cola FEMSA’s historical sales volume and number of transactions for each of its consolidated reporting segments, as well as its unit case and transaction mix by category.

 

     Year Ended December 31,  
     2016     2015     2014  
    

(millions of unit cases or millions of single

units, except percentages)

 

Sales Volume

      

Mexico and Central America

     2,025.6       1,952.4       1,918.5  

South America (excluding Venezuela) (1)(2)

     1,165.3       1,247.6       1,257.7  

Venezuela

     143.1       235.6       241.1  
  

 

 

   

 

 

   

 

 

 

Total Sales Volume

     3,334.0       3,435.6       3,417.3  

Growth

     (3.0 )%      0.5     (0.7 )% 

Unit Case Mix by Category

      

Sparkling beverages

     77.7     78.1     78.1

Water (3)

     15.9     15.7     16.0  

Still beverages

     6.4     6.2     5.9  
  

 

 

   

 

 

   

 

 

 

Total

     100.0     100.0     100.0
  

 

 

   

 

 

   

 

 

 

Number of Transactions

      

Mexico and Central America

     11,382.1       10,877.1       10,622.9  

South America (excluding Venezuela) (1)(2)

     7,619.7       8,084.4       8,140.5  

Venezuela

     772.6       1,318.1       1,367.7  
  

 

 

   

 

 

   

 

 

 

Total Number of Transactions

     19,774.4       20,279.6       20,131.1  

Growth

     (2.5 )%      0.7     —    

Transaction Mix by Category

      

Sparkling beverages

     81.1     81.3     81.8

Water (3)

     8.7     8.6     8.5

Still beverages

     10.2     10.1     9.7
  

 

 

   

 

 

   

 

 

 

Total

     100.0     100.0     100.0

 

(1) Includes sales volume and transactions from the operations of Vonpar from December 2016.
(2) Excludes beer sales volume and transactions.
(3) Includes bulk water volume and transactions.

Total sales volume decreased by 3.0% to 3,334.0 million unit cases in 2016 as compared to 2015, as a result of the sales volume contraction in Brazil, Colombia, Argentina and Venezuela discussed below. Excluding the effects of Coca-Cola FEMSA’s recent acquisition of Vonpar and the results of its operations in Venezuela, total sales volume would have decreased by 0.9% in 2016 as compared to 2015. Sales volume of Coca-Cola FEMSA’s sparkling beverage portfolio decreased by 3.4% as compared to 2015. Excluding the effects of Coca-Cola FEMSA’s recent acquisition of Vonpar and the results of its operations in Venezuela, sales volume of its sparkling beverage portfolio would have decreased by 1.0%, mainly as a result of a contraction in Brazil and Colombia, which was partially offset by the positive performance of the Coca-Cola brand in Mexico, Central America and Colombia, and Coca-Cola FEMSA’s flavored sparkling beverage portfolio in Mexico and Central America. Sales volume of Coca-Cola FEMSA’s still beverage portfolio decreased by 0.6% as compared to 2015. Excluding the effects of Coca-Cola FEMSA’s recent acquisition of Vonpar and the results of its operations in Venezuela, sales volume of its still beverage portfolio would have grown 2.9% mainly driven by the positive performance of ValleFrut orangeade, Del Valle juice and the Santa Clara dairy business in Mexico and Fuze tea in Central America. Sales volume of bottled water, excluding bulk water, decreased by 1.2% as compared to 2015. Excluding the effects of Coca-Cola FEMSA’s recent acquisition of Vonpar and the results of its operations in Venezuela, bottled water, excluding bulk water, would have decreased by 1.1%, driven by a contraction in Brazil and Colombia, which was partially offset by increased volume in Mexico and Argentina. Sales volume of bulk water decreased by 2.0% as compared to 2015. Excluding the effects of Coca-Cola FEMSA’s recent acquisition of Vonpar and the results of its operations in Venezuela, sales volume of bulk water would have decreased by 1.9%, mainly driven by a sales volume contraction of the Brisa and Crystal brand products in Colombia and Brazil, respectively.

 

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The total number of transactions in 2016 decreased by 2.5% to 19,774.4 million transactions as compared to 2015. Excluding the effect of Coca-Cola FEMSA’s recent acquisition of Vonpar and the results of its operations in Venezuela, the total number of transactions in 2016 would have decreased by 0.3% to 18,902.4 million as compared to 2015. On the same basis, total transactions for Coca-Cola FEMSA’s sparkling beverage portfolio in 2016 would have decreased by 0.6% as compared to 2015, mainly driven by a contraction in Brazil, Colombia and Argentina, which was partially offset by the positive performance in Mexico and Central America. Total transactions for Coca-Cola FEMSA’s still beverage category, excluding the effect of its recent acquisition of Vonpar and the results of its operations in Venezuela, would have grown 2.6% as compared to 2015, mainly driven by the positive performance in Mexico and Central America. On the same basis, total transactions for bottled water, including bulk water, would have decreased by 1.1% as compared to 2015, driven by a contraction in Brazil, which was partially offset by the positive performance in Mexico, Central America and Colombia.

In 2016, multiple serving presentations represented 69.1% of total sparkling beverages sales volume, a 70 basis points increase as compared to 2015. Returnable packaging, as a percentage of total sparkling beverage sales volume accounted for 29.1%, a 90 basis points decrease as compared to 2015.

Total sales volume increased 0.5% to 3,435.6 million unit cases in 2015, as compared to 2014. Excluding the results of Coca-Cola FEMSA’s Venezuelan operations, total volume would have grown 0.7% in 2015, as compared to 2014. Our sparkling beverage portfolio grew 0.5% as compared to 2014. Excluding the effect of Coca-Cola FEMSA’s Venezuelan operations, the sparkling beverage portfolio would have grown 0.7% as a result of positive performance of the Coca-Cola brand in Mexico, Colombia and Central America, and Coca-Cola FEMSA’s flavored sparkling beverage portfolio in Mexico, Colombia, Argentina and Central America. The still beverage category grew 4.9% as compared to 2014. Excluding the effect of Coca-Cola FEMSA’s Venezuelan operations, the still beverage category would have grown 6.5% driven by the positive performance of Jugos del Valle juice in Colombia, Mexico and Central America; ValleFrut orangeade in Mexico and Brazil; the Powerade brand across most of Coca-Cola FEMSA’s territories and the Santa Clara dairy business in Mexico. Bottled water, excluding bulk water, grew 2.3% as compared to 2014. Excluding the effect of Coca-Cola FEMSA’s Venezuelan operations, bottled water, excluding bulk water, would have grown 1.8%, driven by growth in Colombia, Argentina, Brazil and Central America. Bulk water decreased 2.9% as compared to 2014, mainly driven by a contraction of the Ciel brand in Mexico.

The total number of transactions in 2015 increased by 0.7% to 20,279.6 million transactions as compared to 2014. Excluding the results of Coca-Cola FEMSA’s operations in Venezuela, the total number of transactions in 2016 would have increased by 1.1% to 18,961.5 million as compared to 2014. On the same basis, total transactions for Coca-Cola FEMSA’s sparkling beverage portfolio in 2015 would have increased by 0.4% as compared to 2014, mainly driven by an increase in the number of transactions in Mexico, Central America, Colombia and Argentina. Total transactions for Coca-Cola FEMSA’s still beverage category, excluding the results of its operations in Venezuela, would have grown 6.0% as compared to 2014, mainly driven by Colombia, Mexico and Argentina. On the same basis, total transactions for bottled water, including bulk water, would have increased by 1.6% as compared to 2014, driven by an increase in the number of transactions in Colombia and Argentina.

 

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In 2015, multiple serving presentations represented 69.9% of total sparkling beverages sales volume, a 8 basis points increase as compared to 2014. Returnable packaging, as a percentage of total sparkling beverage sales volume accounted for 28.2%, a 7 basis points increase as compared to 2014.

The following discussion analyzes Coca-Cola FEMSA’s historical sales volume, number of transactions and unit case and transaction mix by category for each of its consolidated reporting segments.

Mexico and Central America. Coca-Cola FEMSA’s product portfolio consists of Coca-Cola trademark beverages, including the Jugos del Valle line of juice-based beverages .

The following table highlights historical sales volume, number of transactions and unit case and transaction mix by category in Mexico and Central America:

 

     Year Ended December 31,  
     2016     2015     2014  
    

(millions of unit cases or millions of single

units, except percentages)

 

Sales Volume

      

Mexico

     1,850.7       1,784.6       1,754.9  

Central America (1)

     174.9       167.8       163.6  
  

 

 

   

 

 

   

 

 

 

Total Sales Volume

     2,025.6       1,952.4       1,918.5  

Growth

     3.7     1.8     (1.8 )% 

Unit Case Mix by Category

  

Sparkling beverages

     74.1     74.0     73.2

Water (1)

     19.6     20.2     21.3

Still beverages

     6.2     5.8     5.5
  

 

 

   

 

 

   

 

 

 

Total

     100.0     100.0     100.0

Number of Transactions

      

Mexico

     9,884.1       9,429.1       9,214.0  

Central America (1)

     1,498.0       1,448.0       1,409.0  
  

 

 

   

 

 

   

 

 

 

Total Number of Transactions

     11,382.1       10,877.1       10,623.0  

Growth

     4.6     2.4     —    

Transaction Mix by Category

      

Sparkling beverages

     82.9     83.1     82.9

Water (1)

     6.9     7.0     7.6

Still beverages

     10.2     9.9     9.5
  

 

 

   

 

 

   

 

 

 

Total

     100.0     100.0     100.0

 

(1) Includes Guatemala, Nicaragua, Costa Rica and Panama.
(2) Includes bulk water volumes and transactions.

Total sales volume in Coca-Cola FEMSA’s Mexico and Central America consolidated reporting segment increased by 3.7% to 2,025.6 million unit cases in 2016 as compared to 2015, as a result of volume increase in both Mexico and Central America as discussed below. Sales volume of Coca-Cola FEMSA’s sparkling beverage portfolio increased by 3.9%, mainly driven by a 2.8% increase in sales volume of Coca-Cola brand products and an 8.3% increase in sales volume of Coca-Cola FEMSA’s flavored sparkling beverage portfolio. Sales volume of Coca-Cola FEMSA’s still beverage portfolio increased by 11.8%, mainly due to the performance of the Jugos del Valle portfolio and Coca-Cola FEMSA’s Santa Clara dairy business in Mexico. Sales volume of bottled water, including bulk water, increased by 0.7%, mainly driven by an increase in sales volume of Ciel flavored water products in Mexico.

 

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Sales volume in Mexico increased by 3.7% to 1,850.7 million unit cases in 2016, as compared to 1,784.6 million unit cases in 2015. Sales volume of Coca-Cola FEMSA’s sparkling beverage portfolio increased by 3.8%, driven by a 2.7% increase in sales volume of Coca-Cola brand products and a 9.1% increase in sales volume of Coca-Cola FEMSA’s flavored sparkling beverage portfolio, mainly supported by the performance of Naranja&Nada and Limon&Nada , Coca-Cola FEMSA’s sparkling orangeade and lemonade, and the Mundet brand. Sales volume of Coca-Cola FEMSA’s still beverage portfolio increased by 14.2%, mainly as a result of the performance of ValleFrut brand products, the Del Valle juice portfolio and Coca-Cola FEMSA’s Santa Clara dairy business. Sales volume of bottled water, including bulk water, increased by 0.7%, mainly driven by the performance of Ciel Exprim flavored water products.

Sales volume in Central America increased by 4.2% to 174.9 million unit cases in 2016, as compared to 167.8 million unit cases in 2015. Sales volume of Coca-Cola FEMSA’s sparkling beverage portfolio increased by 5.0%, supported by the strong performance of Coca-Cola brand products and Coca-Cola FEMSA’s flavored sparkling beverages portfolio in Guatemala, Nicaragua and Costa Rica. Sales volume of Coca-Cola FEMSA’s still beverage portfolio decreased slightly by 0.3%. Sales volume of bottled water, including bulk water, increased by 1.7%.

The total number of transactions in 2016 in Coca-Cola FEMSA’s Mexico and Central America division increased by 4.6% to 11,382.1 million transactions as compared to 2015. The number of transactions for Coca-Cola FEMSA’s sparkling beverage portfolio in 2016 increased by 4.3% as compared to 2015, driven by the positive performance of the Coca-Cola brand and Coca-Cola FEMSA’s flavored sparkling beverage portfolio. Transactions for Coca-Cola FEMSA’s still beverage category in 2016 increased by 8.3% as compared to 2015. Transactions for bottled water, including bulk water, in 2016 increased by 3.2% as compared to 2015.

In 2016, the total number of transactions in Mexico and Central America increased by 4.8% to 9,884.1 million, and by 3.4% to 1,498.0 million, respectively, as compared to 2015. The number of transactions for Coca-Cola FEMSA’s sparkling beverage portfolio increased by 4.5% and 3.1%, respectively, as compared to 2015. Transactions for Coca-Cola FEMSA’s still beverage category increased by 9.2% and 4.9%, respectively, as compared to 2015. Transactions for bottled water, including bulk water, increased by 3.1% and 3.8%, respectively, as compared to 2015.

In 2016, multiple serving presentations represented 64.7% of total sparkling beverages sales volume in Mexico, a 10 basis points increase as compared to 2015; and 53.4% of total sparkling beverages sales volume in Central America, a 160 basis points decrease as compared to 2015. Coca-Cola FEMSA strategy continues to be to encourage consumption of single serve presentations while maintaining multiple serving volumes. In 2016, returnable packaging, as a percentage of total sparkling beverage sales volume accounted for 35.1% in Mexico, a 140 basis points decrease as compared to 2015; and 39.7% in Central America, a 210 basis points increase as compared to 2015.

Total sales volume in Coca-Cola FEMSA’s Mexico and Central America consolidated reporting segment increased by 1.8% to 1,952.4 million unit cases in 2015 as compared to 2014. Sales volume of Coca-Cola FEMSA’s sparkling beverage portfolio increased by 3.0%, mainly driven by 2.4% increase in sales volume of Coca-Cola brand products and a 5.5% increase in sales volume of Coca-Cola FEMSA’s flavored sparkling beverage portfolio. Sales volume of Coca-Cola FEMSA’s still beverage portfolio increased by 6.8%, mainly due to the performance of the Jugos del Valle portfolio, the Powerade brand and Coca-Cola FEMSA’s Santa Clara dairy business in Mexico. Sales volume of bottled water, including bulk water, decreased by 3.5% driven by a volume contraction of Ciel brand products in Mexico.

Sales volume in Mexico increased by 1.7% to 1,784.6 million unit cases in 2015, as compared to 1,754.9 million unit cases in 2014. Sales volume of Coca-Cola FEMSA’s sparkling beverage portfolio increased by 3.1%, driven by a 2.6% increase in sales volume of Coca-Cola brand products and a 5.7% increase in sales volume of Coca-Cola FEMSA’s flavored sparkling beverage portfolio, mainly supported by the performance of Mundet , Fanta and the introduction of Naranja&Nada and Limon&Nada , Coca-Cola FEMSA’s sparkling orangeade and lemonade. Sales volume of Coca-Cola FEMSA’s still beverage portfolio increased by 5.3%, mainly as a result of the performance of the Del Valle portfolio, the Powerade brand and Coca-Cola FEMSA’s Santa Clara dairy business. Sales volume of bottled water, including bulk water, decreased by 3.7%, driven by a volume contraction of Ciel brand products in Mexico.

 

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Sales volume in Central America increased by 2.6% to 167.8 million unit cases in 2015, as compared to 163.6 million unit cases in 2014. Sales volume of Coca-Cola FEMSA’s sparkling beverage portfolio increased by 1.0% supported by the strong performance of Coca-Cola brand products and Coca-Cola FEMSA’s flavored sparkling beverages portfolio in Nicaragua and Panama. Sales volume of Coca-Cola FEMSA’s still beverage portfolio increased by 15.6%, due to the performance of the Powerade brand in Central America, Fuze tea in Costa Rica and Hi-C juice in Nicaragua. Sales volume of bottled water, including bulk water, increased 7.6% across the region.

The total number of transactions in 2015 in Coca-Cola FEMSA’s Mexico and Central America division increased by 2.4% to 10,877.1 million transactions as compared to 2014. The number of transactions for Coca-Cola FEMSA’s sparkling beverage portfolio in 2015 increased by 2.8% as compared to 2014, mainly driven by a 2.9% increase in Mexico. Transactions for Coca-Cola FEMSA’s still beverage category in 2015 increased by 6.1% as compared to 2014. Transactions for bottled water, including bulk water, in 2015 decreased by 6.4% as compared to 2014, driven by a 7.4% contraction in Mexico.

In 2015, the total number of transactions in Mexico and Central America increased by 2.3% to 9,429.1 million, and by 2.8% to 1,448.0 million, respectively, as compared to 2014. The number of transactions for Coca-Cola FEMSA’s sparkling beverage portfolio increased by 2.8% and 2.1%, respectively, as compared to 2014. Transactions for Coca-Cola FEMSA’s still beverage category increased by 6.4% and 4.8%, respectively, as compared to 2014. Transactions for bottled water, including bulk water, decreased by 7.4% in Mexico and increased by 7.6% in Central America, as compared to 2014.

In 2015, multiple serving presentations represented 64.6% of total sparkling beverages sales volume in Mexico, a 10 basis points increase as compared to 2014; and 55.0% of total sparkling beverages sales volume in Central America, a 10 basis points decrease as compared to 2014. In 2015, returnable packaging, as a percentage of total sparkling beverage sales volume accounted for 36.5% in Mexico, a 140 basis points decrease as compared to 2014; and 37.6% in Central America, a 280 basis points increase as compared to 2014.

South America (Excluding Venezuela). Coca-Cola FEMSA’s product portfolio in South America (excluding Venezuela) consists mainly of Coca-Cola trademark beverages, including the Jugos del Valle line of juice-based beverages in Colombia and Brazil, and Heineken beer products, including Kaiser beer brands, in Brazil, which Coca-Cola FEMSA sells and distributes pursuant to its arrangements in place since 2003 with Cervejarias Kaiser, a subsidiary of the Heineken Group. Since 2005, Coca-Cola FEMSA stopped considering beer sold and distributed in Brazil as part of its sales volume.

The following table highlights historical sales volume, number of transactions and unit case and transaction mix by category in South America (excluding Venezuela), not including beer:

 

     Year Ended December 31,  
     2016     2015     2014  
    

(millions of unit cases or millions of

single units, except percentages)

 

Sales Volume

      

Brazil (1)

     649.2       693.6       733.5  

Colombia

     307.0       320.0       298.4  

Argentina

     209.1       233.9       225.8  
  

 

 

   

 

 

   

 

 

 

Total Sales Volume

     1,165.3       1,247.6       1,257.7  

Growth

     (6.6 )%      (0.8 )%      22.6

Unit Case Mix by Category

  

Sparkling beverages

     83.0     82.8     84.1

Water (2)

     10.3     10.4     9.7

Still beverages

     6.7     6.8     6.2
  

 

 

   

 

 

   

 

 

 

Total

     100.0     100.0     100.0

 

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     Year Ended December 31,  
     2016     2015     2014  
    

(millions of unit cases or millions of

single units, except percentages)

 

Number of Transactions

      

Brazil (1)

     4,206.1       4,578.6       4,902.3  

Colombia

     2,400.9       2,410.7       2,199.8  

Argentina

     1,012.6       1,095.0       1,038.4  
  

 

 

   

 

 

   

 

 

 

Total Number of Transactions

     7,619.6       8,084.3       8,140.5  

Growth

     (5.7 )%      (0.7 )%      —    

Transaction Mix by Category

      

Sparkling beverages

     79.0     79.4     81.0

Water (2)

     10.7     10.5     9.5

Still beverages

     10.3     10.1     9.5
  

 

 

   

 

 

   

 

 

 

Total

     100.0     100.0     100.0

 

(1) Includes sales volume and transactions from the operations of Vonpar from December 2016.
(2) Includes bulk water volumes and transactions.

Total sales volume in Coca-Cola FEMSA’s South America (excluding Venezuela) consolidated reporting segment decreased by 6.6% to 1,165.3 million unit cases in 2016 as compared to 2015. Excluding the effects of Coca-Cola FEMSA’s recent acquisition of Vonpar, total sales volume would have decreased by 8.2% to 1,145.7 million unit cases in 2016 as compared to 2015, as a result of volume contraction in all of Coca-Cola FEMSA’s South America operations. On the same basis, sales volume of Coca-Cola FEMSA’s sparkling beverage portfolio decreased by 8.0%, mainly due to a volume contraction of Coca-Cola brand products in Brazil and Argentina and flavored sparkling beverages in all Coca-Cola FEMSA’s territories in this division. Excluding the effects of Coca-Cola FEMSA’s recent acquisition of Vonpar, sales volume of Coca-Cola FEMSA’s still beverage portfolio decreased by 8.9%, mainly driven by a sales volume contraction of the Jugos del Valle line of business in Colombia and Kapo and Del Valle Mais brand products in Brazil. On the same basis, sales volume of bottled water, including bulk water, decreased by 8.7%, mainly due to a sales volume contraction of Brisa brand products in Colombia and Crystal brand products in Brazil.

Sales volume in Brazil decreased by 6.4% to 649.2 million unit cases in 2016, as compared to 693.6 million unit cases in 2015. Excluding the effects of Coca-Cola FEMSA’s recent acquisition of Vonpar, sales volume would have decreased by 9.2% to 629.7 million unit cases. On the same basis, sales volume of Coca-Cola FEMSA’s sparkling beverage portfolio decreased by 9.0%, mainly as a result of a sales volume decrease in Coca-Cola brand products. Excluding the effects of Coca-Cola FEMSA’s recent acquisition of Vonpar, sales volume of Coca-Cola FEMSA’s still beverage portfolio decreased by 7.2%, mainly as a result of a sales volume contraction of Kapo and Del Valle Mais brand products. On the same basis, sales volume of bottled water, including bulk water, decreased by 13.1%, mainly due to a sales volume contraction of Crystal brand products.

Sales volume in Colombia decreased by 4.1% to 307.0 million unit cases in 2016, as compared to 320.0 million unit cases in 2015. Sales volume of Coca-Cola FEMSA’s sparkling beverage portfolio decreased by 0.7%, mainly driven by a 9.4% decrease in sales volume of Coca-Cola FEMSA’s flavored sparkling beverages portfolio, which was partially offset by a 1.9% sales volume increase of Coca-Cola brand products. Sales volume of Coca-Cola FEMSA’s still beverage portfolio decreased by 13.6%, mainly as a result of a sales volume contraction of Del Valle and ValleFrut brand products. Sales volume of bottled water, including bulk water, decreased by 11.8%, driven by a sales volume contraction of Brisa brand products in multiple serving presentations.

Sales volume in Argentina decreased by 10.6% to 209.1 million unit cases in 2016, as compared to 233.9 million unit cases in 2015. Sales volume of Coca-Cola FEMSA’s sparkling beverage portfolio decreased by 13.6%, mainly driven by a decrease in sales volume of Coca-Cola brand products and Coca-Cola FEMSA’s flavored sparkling beverage portfolio. Sales volume of Coca-Cola FEMSA’s still beverage portfolio decreased by 0.6%, mainly driven by a decrease in sales volume of Cepita and Powerade brand products. Sales volume of bottled water, including bulk water, increased by 6.9%, mainly driven by an increase in sales volume of Kin and Bonaqua brand products.

 

 

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The total number of transactions in 2016 in Coca-Cola FEMSA’s South America (excluding Venezuela) division decreased by 5.7% to 7,619.7 million transactions as compared to 2015. Excluding the effect of Coca-Cola FEMSA’s recent acquisition of Vonpar, the total number of transactions in 2016 in this division would have decreased by 7.0% to 7,520.3 million. On the same basis, the number of transactions for Coca-Cola FEMSA’s sparkling beverage portfolio in 2016 decreased by 7.5% as compared to 2015, driven by a contraction in the number of transactions across all Coca-Cola FEMSA’s territories in the division. Excluding the effects of Coca-Cola FEMSA’s recent acquisition of Vonpar, transactions for Coca-Cola FEMSA’s still beverage category in 2016 decreased by 4.8% as compared to 2015. On the same basis, transactions for bottled water, including bulk water, in 2016 decreased by 5.0% as compared to 2015.

In 2016, the total number of transactions in Brazil, Colombia and Argentina decreased by 8.1% to 4,206.1 million, 0.4% to 2,400.9 million and 7.5% to 1,012.6 million, respectively, as compared to 2015. Excluding the effect of Coca-Cola FEMSA’s recent acquisition of Vonpar, the total number of transactions in Brazil in 2016 would have decreased by 10.3% to 4,106.7 million. On the same basis, the number of transactions for Coca-Cola FEMSA’s sparkling beverage portfolio in Brazil, Colombia and Argentina in 2016 decreased by 10.0%, 1.2% and 9.2%, respectively, as compared to 2015. Excluding the effects of Coca-Cola FEMSA’s recent acquisition of Vonpar, transactions for Coca-Cola FEMSA’s still beverage category in 2016 decreased by 10.3% and 0.5% in Brazil and Argentina, respectively, and increased by 0.5% in Colombia, in each case as compared to 2015. On the same basis, the number of transactions for bottled water, including bulk water, in 2016 decreased by 13.6% and 1.1% in Brazil and Argentina, respectively, and increased by 2.7% in Colombia, in each case as compared to 2015.

In 2016, multiple serving presentations represented 76.3% of total sparkling beverages sales volume in Brazil, a 66 basis points increase as compared to 2015; 69.3% of total sparkling beverages sales volume in Colombia, a 121 basis points decrease as compared to 2015; and 82.7% of total sparkling beverages sales volume in Argentina, a 178 basis points decrease as compared to 2015. In 2016, returnable packaging, as a percentage of total sparkling beverage sales volume, accounted for 18.1% in Brazil a 120 basis points increase as compared to 2015; 29.9% in Colombia, an increase of 80 basis points as compared to 2015; and 23.9% in Argentina, an increase of 150 basis points as compared to 2015.

Total sales volume in Coca-Cola FEMSA’s South America (excluding Venezuela) consolidated reporting segment decreased by 0.8% to 1,247.6 million unit cases in 2015 as compared to 2014, as a result of a volume contraction in Brazil which was partially offset by volume growth in Colombia and Argentina. Sales volume of Coca-Cola FEMSA’s sparkling beverage portfolio decreased by 2.3% mainly driven by the volume contraction in Brazil. Sales volume of our still beverage portfolio increased by 7.5% mainly driven by the Jugos del Valle line of business in Colombia and the Cepita and Hi-C brands in Argentina. Sales volume of bottled water, including bulk water, increased by 7.5% driven by the performance of the Crystal brand in Brazil, the Manantial and Brisa brands in Colombia and the Aquarius , Kin and Bonaqua brands in Argentina.

Sales volume in Brazil decreased by 5.4% to 693.6 million unit cases in 2015, as compared to 733.5 million unit cases in 2014. Sales volume of Coca-Cola FEMSA’s sparkling beverage portfolio decreased by 5.8%, mainly as a result of a volume contraction in the Coca-Cola brand products. Sales volume of Coca-Cola FEMSA’s still beverage portfolio decreased by 8.8%, mainly as a result of a volume contraction in Del Valle Mais brand products. Sales volume of bottled water, including bulk water, increased by 1.2%, mainly driven by a sales volume increase in Crystal brand products.

Sales volume in Colombia increased by 7.2% to 320.0 million unit cases in 2015, as compared to 298.4 million unit cases in 2014. Sales volume of Coca-Cola FEMSA’s sparkling beverage portfolio increased by 6.2%, mainly driven by a 3.7% volume increase of Coca-Cola brand products, and a 14.2% volume increase of Coca-Cola FEMSA’s flavored sparkling beverages portfolio. Sales volume of Coca-Cola FEMSA’s still beverage portfolio increased by 19.1%, mainly driven by volume increase of Del Valle Fresh and Fuze tea brand products. Sales volume of bottled water, including bulk water, increased by 5.8%, mainly driven by a volume increase in Manantial and Brisa brand products in single serve presentations.

 

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Sales volume in Argentina increased by 3.6% to 233.9 million unit cases in 2015, as compared to 225.8 million unit cases in 2014. Sales volume of Coca-Cola FEMSA’s sparkling beverage portfolio decreased by 0.2%, mainly driven by a volume decrease in Coca-Cola brand products, which was mostly offset by the performance of the Sprite and Schweppes brands. Sales volume of Coca-Cola FEMSA’s still beverage portfolio increased by 31.9%, mainly driven by a volume increase in Hi-C , Cepita and Powerade brand products. Sales volume of bottled water, including bulk water, increased by 28.0%, mainly driven by a volume increase in Aquarius , Kin and Bonaqua brand products.

The total number of transactions in 2015 in Coca-Cola FEMSA’s South America (excluding Venezuela) division decreased by 0.7% to 8,084.3 million transactions as compared to 2014. The number of transactions for Coca-Cola FEMSA’s sparkling beverage portfolio in 2015 decreased by 2.7% as compared to 2014, driven by a 6.4% contraction in the number of transactions in Brazil, which was partially offset by an increase in the number of transactions in Colombia and Argentina. Transactions for Coca-Cola FEMSA’s still beverage category in 2015 increased by 5.9% as compared to 2014. Transactions for bottled water, including bulk water, in 2015 increased by 10.0% as compared to 2014.

In 2015, the total number of transactions in Brazil decreased by 6.6% to 4,578.6 million, and the total number of transactions in Colombia and Argentina increased by 9.6% to 2,410.7 million and 5.5% to 1,095.0 million, respectively, in each case as compared to 2014. The number of transactions for Coca-Cola FEMSA’s sparkling beverage portfolio in 2015 decreased by 6.4% in Brazil and increased by 3.7% and 2.1% in Colombia and Argentina, respectively, in each case as compared to 2014. Transactions for Coca-Cola FEMSA’s still beverage portfolio in 2015 increased by 34.7% and 24.1% in Colombia and Argentina, respectively, and decreased by 12.8% in Brazil, in each case as compared to 2014. The number of transactions for bottled water, including bulk water, in 2015 increased by 21.8% and 20.4% in Colombia and Argentina, respectively, and decreased by 1.8% in Brazil, in each case as compared to 2014.

In 2015, multiple serving presentations represented 75.7% of total sparkling beverages sales volume in Brazil, a 70 basis points increase as compared to 2014; 70.6% of total sparkling beverages sales volume in Colombia, a 79 basis points decrease as compared to 2014; and 84.5% of total sparkling beverages sales volume in Argentina, a 76 basis points decrease as compared to 2014. In 2015, returnable packaging, as a percentage of total sparkling beverage sales volume, accounted for 16.9% in Brazil, an increase of 140 basis points as compared to 2014; 29.1% in Colombia, a decrease of 290 basis points as compared to 2014; and 22.4% in Argentina, an increase of 270 basis points as compared to 2014.

Venezuela. Coca-Cola FEMSA’s product portfolio in Venezuela consists of Coca-Cola trademark beverages. Coca-Cola FEMSA has implemented a product portfolio rationalization strategy that allows it to minimize the impact of certain operating disruptions that have been recurrent in Venezuela over the last several years related to difficulties in accessing raw materials due to the delay in obtaining the corresponding import authorizations and the Venezuelan exchange controls.

 

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The following table highlights historical sales volume, number of transactions and unit case and transaction mix by category in Venezuela:

 

     Year Ended December 31,  
     2016     2015     2014  
    

(millions of unit cases or millions of

single units, except percentages)

 

Sales Volume

      

Total

     143.1       235.6       241.1  

Growth

     (39.3 )%      (2.3 )%      8.2

Unit Case Mix by Category

  

Sparkling beverages

     83.8     86.2     85.7

Water (1)

     10.0     6.8     6.5

Still beverages

     6.2     7.0     7.8
  

 

 

   

 

 

   

 

 

 

Total

     100.0     100.0     100.0

Number of Transactions

      

Total

     772.6       1,318.1       1,367.7  

Growth

     (41.4 )%      (3.6 )%       

Transaction Mix by Category

      

Sparkling beverages

     75.0     79.0     78.7

Water (1)

     15.3     9.7     8.9

Still beverages

     9.7     11.3     12.4
  

 

 

   

 

 

   

 

 

 

Total

     100.0     100.0     100.0

 

(1) Includes bulk water volumes and transactions.

Total sales volume in Venezuela decreased by 39.3% to 143.1 million unit cases in 2016 as compared to 2015, mainly due to an overall sales volume contraction in all Coca-Cola FEMSA’s categories as a result of the scarcity of raw materials and demand for its products. Sales volume of Coca-Cola FEMSA’s sparkling beverage portfolio decreased by 41.0%. Sales volume of Coca-Cola FEMSA’s still beverage portfolio decreased by 46.4%. Sales volume of bottled water, including bulk water, decreased by 10.0%.

The number of transactions in 2016 in Venezuela decreased by 41.4% to 772.6 million transactions as compared to 2015. The number of transactions for our sparkling beverage portfolio in 2016 decreased by 44.4% as compared to 2015, mainly driven by a contraction in the number of transactions of Coca-Cola brand products and Coca-Cola FEMSA’s flavored sparkling beverage portfolio. Transactions for Coca-Cola FEMSA’s still beverage category in 2016 decreased by 49.6% as compared to 2015. Transactions for bottled water, including bulk water, in 2016 decreased by 7.2% as compared to 2015.

In 2016, multiple serving presentations represented 85.0% of total sparkling beverages sales volume in Venezuela, a 260 basis points increase as compared to 2015. In 2016, returnable presentations represented 6.5% of total sparkling beverages sales volume in Venezuela, a decrease of 40 basis points as compared to 2015.

Total sales volume in Venezuela decreased by 2.3% to 235.6 million unit cases in 2015 as compared to 2014. Sales volume of Coca-Cola FEMSA’s sparkling beverage portfolio decreased by 2.1%, driven by a volume contraction in Coca-Cola FEMSA’s flavored sparkling beverage portfolio, which was partially offset by a 3.4% volume increase of Coca-Cola brand products. Sales volume of Coca-Cola FEMSA’s still beverage portfolio decreased by 11.3%, mainly as a result of a volume decrease in Del Valle brand products. Sales volume of bottled water, including bulk water, increased by 6.1% mainly driven by a volume increase of Nevada brand products.

The number of transactions in 2015 in Venezuela decreased by 3.6% to 1,318.1 million transactions as compared to 2014. The number of transactions for Coca-Cola FEMSA’s sparkling beverage portfolio in 2015 decreased by 3.2% as compared to 2014, mainly driven by a contraction of 8.7% in the number of transactions of Coca-Cola FEMSA’s flavored sparkling beverage products. Transactions for Coca-Cola FEMSA’s still beverage category in 2015 decreased by 12.5% as compared to 2014. Transactions for bottled water, including bulk water, increased by 5.3% as compared to 2014.

 

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In 2015, multiple serving presentations represented 82.4% of total sparkling beverages sales volume in Venezuela, a 50 basis points increase as compared to 2014. In 2015, returnable presentations represented 6.9% of total sparkling beverages sales volume in Venezuela, which remained flat as compared to 2014.

Seasonality

Sales of Coca-Cola FEMSA’s products are seasonal in all of the countries where it operates, as its sales volumes generally increase during the summer of each country and during the year-end holiday season. In Mexico, Central America, Colombia and Venezuela, Coca-Cola FEMSA typically achieves its highest sales during the summer months of April through September as well as during the year-end holidays in December. In Brazil and Argentina, Coca-Cola FEMSA’s highest sales levels occur during the summer months of October through March and the year-end holidays in December.

Marketing

Coca-Cola FEMSA, in conjunction with The Coca-Cola Company, has developed a marketing strategy to promote the sale and consumption of its products. Coca-Cola FEMSA relies extensively on advertising, sales promotions and retailer support programs to target the particular preferences of its consumers. Coca-Cola FEMSA’s consolidated marketing expenses in 2016, net of contributions by The Coca-Cola Company, were Ps.5,030 million. The Coca-Cola Company contributed an additional Ps.4,518 million in 2016, which mainly includes contributions for coolers, bottles and cases. Through the use of advanced information technology, Coca-Cola FEMSA has collected customer and consumer information that allow it to tailor its marketing strategies to target different types of customers located in each of its territories and to meet the specific needs of the various markets it serves.

Retailer Support Programs . Support programs include providing retailers with point-of-sale display materials and consumer sales promotions, such as contests, sweepstakes and the giveaway of product samples.

Coolers . Coolers play an integral role in Coca-Cola FEMSA’s clients’ plans for success. Increasing both cooler coverage and the number of cooler doors among Coca-Cola FEMSA’s retailers is important to ensure that Coca-Cola FEMSA’s wide variety of products are properly displayed, while strengthening Coca-Cola FEMSA’s merchandising capacity in the traditional sales channel to significantly improve its point-of-sale execution.

Advertising . Coca-Cola FEMSA advertises in all major communications media. Coca-Cola FEMSA focuses its advertising efforts on increasing brand recognition by consumers and improving its customer relations. National advertising campaigns are designed and proposed by The Coca-Cola Company’s local affiliates in the countries where Coca-Cola FEMSA operates, with Coca-Cola FEMSA’s input at the local or regional level. Point-of-sale merchandising and advertising efforts are proposed and implemented by Coca-Cola FEMSA, with a focus on increasing Coca-Cola FEMSA’s connection with customers and consumers.

Channel Marketing . In order to provide more dynamic and specialized marketing of its products, Coca-Cola FEMSA’s strategy is to classify its markets and develop targeted efforts for each consumer segment or distribution channel. Coca-Cola FEMSA’s principal channels are small retailers, “on-premise” accounts, such as restaurants and bars, supermarkets and third party distributors. Presence in these channels entails a comprehensive and detailed analysis of the purchasing patterns and preferences of various groups of beverage consumers in each of the different types of locations or distribution channels. In response to this analysis, Coca-Cola FEMSA tailors its product, price, packaging and distribution strategies to meet the particular needs of and exploit the potential of each channel.

Multi-Segmentation . Coca-Cola FEMSA has implemented a multi-segmentation strategy in all of its markets. These strategies consist of the implementation of different product/price/package portfolios by market cluster or group. These clusters are defined based on consumption occasion, competitive environment and income level, rather than solely on the types of distribution channels.

Coca-Cola FEMSA believes that the implementation of these strategies described above also enables it to respond to competitive initiatives with channel-specific responses as opposed to market-wide responses. In addition, it allows Coca-Cola FEMSA to be more efficient in the way it goes to market and invests its marketing resources in those segments that could provide a higher return. Our marketing, segmentation and distribution activities are facilitated by Coca-Cola FEMSA’s management information systems, and are all incorporated within Coca-Cola FEMSA’s centers of excellence.

 

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Product Sales and Distribution

The following table provides an overview of Coca-Cola FEMSA’s distribution centers and the retailers to which it sells its products:

 

     As of December 31, 2016  
     Mexico and Central America (1)      South  America (2)      Venezuela  

Distribution centers

     179        71        26  

Retailers (3)

     980,237        845,139        168,833  

 

(1) Includes Mexico, Guatemala, Nicaragua, Costa Rica and Panama.
(2) Includes Colombia, Brazil and Argentina.
(3) Estimated.

Coca-Cola FEMSA continuously evaluates its distribution model in order to fit with the local dynamics of the marketplace and analyze the way it goes to market, recognizing different service needs from its customers, while looking for a more efficient distribution model. As part of this strategy, Coca-Cola FEMSA is rolling out a variety of new distribution models throughout its territories looking for improvements in its distribution network.

Coca-Cola FEMSA uses several sales and distribution models depending on market, geographic conditions and the customer’s profile: (i) the pre-sale system, which separates the sales and delivery functions, permitting trucks to be loaded with the mix of products that retailers have previously ordered, thereby increasing both sales and distribution efficiency; (ii) the conventional truck route system, in which the person in charge of the delivery makes immediate sales from inventory available on the truck; (iii) a hybrid distribution system, where the same truck carries product available for immediate sale and product previously ordered through the pre-sale system; (iv) the telemarketing system, which could be combined with pre-sales visits; and (v) sales through third-party wholesalers of its products.

As part of the pre-sale system, sales personnel also provide merchandising services during retailer visits, which Coca-Cola FEMSA believes enhances the shopper experience at the point of sale. Coca-Cola FEMSA believes that an adequate number of service visits to retailers and frequency of deliveries are essential elements in an effective selling and distribution system of its products.

Coca-Cola FEMSA’s distribution centers range from large warehousing facilities and re-loading centers to small deposit centers. In addition to its fleet of trucks, Coca-Cola FEMSA distributes its products in certain locations through electric carts and hand-trucks in order to comply with local environmental and traffic regulations. In some of its territories, Coca-Cola FEMSA retains third parties to transport its finished products from the bottling plants to the distribution centers.

Mexico . Coca-Cola FEMSA contracts with one of our subsidiaries for the transportation of finished products to its distribution centers from its production facilities. From the distribution centers, Coca-Cola FEMSA then distributes its finished products to retailers through its fleet of trucks.

In Mexico, Coca-Cola FEMSA sells a majority of its beverages at small retail stores to consumers who may take the beverages for consumption at home or elsewhere. Coca-Cola FEMSA also sells products through the “on-premise” consumption segment, supermarkets and other locations. The “on-premise” consumption segment consists of sales through sidewalk stands, restaurants, bars and various types of dispensing machines as well as sales through point-of-sale programs in stadiums, concert halls, auditoriums and theaters.

 

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Brazil. In Brazil, Coca-Cola FEMSA distributes its finished products to retailers through a combination of its own fleet of trucks and third party distributors, while Coca-Cola FEMSA maintains control over the selling function. In designated zones in Brazil, third-party distributors purchase Coca-Cola FEMSA’s products at a discount from the wholesale price and resell the products to retailers. Coca-Cola FEMSA also sells its products through modern distribution channels. Modern distribution channels in Brazil include large and organized chain retail outlets such as wholesale supermarkets, discount stores and convenience stores that sell fast-moving consumer goods, where retailers can buy large volumes of products from various producers.

Territories other than Mexico and Brazil . Coca-Cola FEMSA distributes its finished products to retailers through a combination of its own fleet of trucks and third party distributors. In most of its territories, an important part of its total sales volume is sold through small retailers, with low supermarket penetration.

Competition

While Coca-Cola FEMSA believes that its products enjoy wider recognition and greater consumer loyalty than those of its principal competitors, the markets in the territories where Coca-Cola FEMSA operates are highly competitive. Coca-Cola FEMSA’s principal competitors are local Pepsi bottlers and other bottlers and distributors of local beverage brands. Coca-Cola FEMSA faces increased competition in many of its territories from producers of low price beverages, commonly referred to as “B brands.” A number of Coca-Cola FEMSA’s competitors in Central America, Venezuela, Brazil and Argentina offer beer in addition to sparkling beverages, still beverages, and water, which may enable them to achieve distribution efficiencies.

While competitive conditions are different in each of Coca-Cola FEMSA’s territories, Coca-Cola FEMSA competes mainly in terms of price, packaging, effective promotional activities, access to retail outlets and sufficient shelf space, customer service, product innovation and product alternatives and the ability to identify and satisfy consumer preferences. Coca-Cola FEMSA competes by seeking to offer products at an attractive price in the different segments in its markets and by building on the value of its brands. Coca-Cola FEMSA believes that the introduction of new products and new presentations has been a significant competitive technique that allows it to increase demand for its products, provide different options to consumers and increase new consumption opportunities. See “Item 4—Coca-Cola FEMSA—Our Products” and “Item 4—Coca-Cola FEMSA—Packaging.”

Mexico and Central America . Coca-Cola FEMSA’s principal competitors in Mexico are bottlers of Pepsi products, whose territories overlap but are not co-extensive with Coca-Cola FEMSA’s own. Coca-Cola FEMSA competes with Organización Cultiba, S.A.B. de C.V., a joint venture formed by Grupo Embotelladoras Unidas, S.A.B. de C.V., the former Pepsi bottler in central and southeast Mexico, a subsidiary of PepsiCo, and Empresas Polar, S.A., the leading beer distributor and Pepsi bottler in Venezuela. Coca-Cola FEMSA’s main competition in the juice category in Mexico is Grupo Jumex. In the water category, Bonafont , a water brand owned by Grupo Danone, is Coca-Cola FEMSA’s main competition. In addition, Coca-Cola FEMSA competes with Cadbury Schweppes in sparkling beverages and with other local brands in our Mexican territories, as well as “B brand” producers, such as Ajemex, S.A. de C.V. ( Big Cola bottler) and Consorcio AGA, S.A. de C.V. ( Red Cola bottler), that offer various presentations of sparkling and still beverages.

In the countries that comprise Coca-Cola FEMSA’s Central America region, Coca-Cola FEMSA’s main competitors are Pepsi and Big Cola bottlers. In Guatemala and Nicaragua, Coca-Cola FEMSA competes with a joint venture between AmBev and The Central American Bottler Corporation. In Costa Rica, Coca-Cola FEMSA’s principal competitor is Florida Bebidas S.A., subsidiary of Florida Ice and Farm Co. In Panama, Coca-Cola FEMSA’s main competitor is Cervecería Nacional, S.A. Coca-Cola FEMSA also faces competition from “B brands” offering multiple serving size presentations in some Central American countries.

South America (excluding Venezuela) . Coca-Cola FEMSA’s principal competitor in Colombia is Postobón, a well-established local bottler ( Postobón and Colombiana bottler). Postobón sells manzana Postobón (apple Postobón), which is the second most popular flavor in the Colombian sparkling beverage industry in terms of total sales volume. Postobón also sells Pepsi products. Postobón is a vertically integrated producer, the owners of which hold other significant commercial interests in Colombia. Coca-Cola FEMSA also competes with low-price producers, such as the producers of Big Cola , which principally offer multiple serving size presentations in the sparkling and still beverage industry.

 

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In Brazil, Coca-Cola FEMSA competes against AmBev, a Brazilian company with a portfolio of brands that includes Pepsi , local brands with flavors such as guarana, and proprietary beer brands. Coca-Cola FEMSA also competes against “B brands” or “Tubainas,” which are small, local producers of low-cost flavored sparkling beverages that represent a significant portion of the sparkling beverage market.

In Argentina, Coca-Cola FEMSA’s main competitor is Buenos Aires Embotellador S.A. (BAESA), a Pepsi bottler, which is owned by Argentina’s principal brewery, Quilmes Industrial S.A., and indirectly controlled by AmBev. In addition, Coca-Cola FEMSA competes with a number of competitors offering generic, low-priced sparkling beverages as well as many other generic products and private label proprietary supermarket brands.

Venezuela . In Venezuela, Coca-Cola FEMSA’s main competitor is Pepsi-Cola Venezuela, C.A., a joint venture formed between PepsiCo and Empresas Polar, S.A., the leading beer distributor in the country. Coca-Cola FEMSA also competes with the producers of Big Cola in part of this country.

Raw Materials

Pursuant to its bottler agreements, Coca-Cola FEMSA is authorized to manufacture, sell and distribute Coca-Cola trademark beverages within specific geographic areas, and Coca-Cola FEMSA is required to purchase concentrate for all Coca-Cola trademark beverages in all of its territories from companies designated by The Coca-Cola Company and sweeteners and other raw materials from companies authorized by The Coca-Cola Company. Concentrate prices for Coca-Cola trademark beverages are determined as a percentage of the weighted average retail price in local currency net of applicable taxes. Although The Coca-Cola Company has the right to unilaterally set the price of concentrates, in practice this percentage has historically been set pursuant to periodic negotiations with The Coca-Cola Company.

In the past, The Coca-Cola Company has increased concentrate prices for Coca-Cola trademark beverages in some of the countries where Coca-Cola FEMSA operates. In 2014, The Coca-Cola Company informed Coca-Cola FEMSA that it would gradually increase concentrate prices for certain Coca-Cola trademark beverages over a five-year period in Costa Rica and Panama beginning in 2014. In 2015, The Coca-Cola Company informed Coca-Cola FEMSA that it would gradually increase concentrate prices for flavored water over a four-year period in Mexico beginning in April 2015 and that it would gradually increase concentrate prices for certain Coca-Cola trademark beverages over a two-year period in Colombia beginning in 2016. In 2016, The Coca-Cola Company informed Coca-Cola FEMSA that it would gradually increase concentrate prices for Coca-Cola trademark beverages over a three-year period in Mexico beginning in July 2017. Based on Coca-Cola FEMSA’s estimates, Coca-Cola FEMSA currently does not expect these increases will have a material adverse effect on its results of operations. The Coca-Cola Company may unilaterally increase concentrate prices again in the future and Coca-Cola FEMSA may not be successful in negotiating or implementing measures to mitigate the negative effect this may have in the prices of its products or its results.

In addition to concentrate, Coca-Cola FEMSA purchases sweeteners, carbon dioxide, resin and preforms to make plastic bottles, finished plastic and glass bottles, cans, caps and fountain containers, as well as other packaging materials and raw materials. Sweeteners are combined with water to produce basic syrup, which is added to the concentrate as the sweetener for most of Coca-Cola FEMSA’s beverages. Coca-Cola FEMSA’s bottler agreements provide that, with respect to Coca-Cola trademark beverages, these materials may be purchased only from suppliers approved by The Coca-Cola Company. Prices for certain raw materials, including those used in the bottling of Coca-Cola FEMSA’s products, mainly resin, finished plastic bottles, aluminum cans, HFCS and certain sweeteners, are paid in or determined with reference to the U.S. dollar, and therefore local prices in a particular country may increase based on changes in the applicable exchange rates. Coca-Cola FEMSA’s most significant packaging raw material costs arise from the purchase of resin, the price of which is related to crude oil prices and global resin supply. The average price that we paid for resin in U.S. dollars in 2016 decreased 14.1% as compared to 2015 in all Coca-Cola FEMSA’s territories, excluding Venezuela; however, given that high currency volatility has affected and continues to affect most of Coca-Cola FEMSA’s territories, the average price for resin in local currencies was higher in 2016 in Argentina and Mexico. In 2016, we purchased certain raw materials in advance and entered into certain derivative transactions, which helped Coca-Cola FEMSA capture opportunities with respect to raw material costs and currency exchange rates.

 

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Under Coca-Cola FEMSA’s agreements with The Coca-Cola Company, Coca-Cola FEMSA may use raw or refined sugar or HFCS as sweeteners in its products. Sugar prices in all of the countries where Coca-Cola FEMSA operates, other than Brazil, are subject to local regulations and other barriers to market entry that cause Coca-Cola FEMSA to pay for sugar in excess of international market prices for sugar in certain countries. In recent years, international sugar prices experienced significant volatility. Across Coca-Cola FEMSA’s territories, Coca-Cola FEMSA’s average price for sugar in U.S. dollars, taking into account its financial hedging activities decreased approximately 1.1% (excluding Venezuela) or 12.0% (including Venezuela) in 2016 as compared to 2015; however, the average price for sugar in local currency was higher in all of Coca-Cola FEMSA’s operations, except for Guatemala.

Coca-Cola FEMSA categorizes water as a raw material in its business. Coca-Cola FEMSA obtains water for the production of some of its natural spring water products, such as Manantial in Colombia and Crystal in Brazil, from spring water pursuant to concessions granted.

None of the materials or supplies that Coca-Cola FEMSA uses is presently in short supply, although the supply of specific materials could be adversely affected by strikes, weather conditions, governmental controls, national emergency situations, water shortages or the failure to maintain our existing water concessions.

Mexico and Central America . In Mexico, Coca-Cola FEMSA purchases its returnable plastic bottles from Graham Packaging México, S.A. de C.V., known as Graham, and Envases Universales de México, S.A.P.I. de C.V. Coca-Cola FEMSA mainly purchases resin from Indorama Ventures Polymers México, S. de R.L. de C.V. (formerly Arteva Specialties, S. de R.L. de C.V.), M&G Polímeros México, S.A. de C.V. and DAK Resinas Americas Mexico, S.A. de C.V., which Alpla México, S.A. de C.V., known as Alpla, and Envases Universales de México, S.A.P.I. de C.V. manufacture into non-returnable plastic bottles for Coca-Cola FEMSA. Also, Coca-Cola FEMSA has introduced into its business Asian global suppliers, such as Far Eastern New Century Corp. or FENC, which supports its PET strategy mainly for Central America and is known as one of the top five PET global suppliers.

Coca-Cola FEMSA purchases all of its cans from Fábricas de Monterrey, S.A. de C.V., or FAMOSA, and Envases Universales de México, S.A.P.I. de C.V., through Promotora Mexicana de Embotelladoras, S.A. de C.V., known as PROMESA, a cooperative of Coca-Cola bottlers, in which, as of April 7, 2017, Coca-Cola FEMSA held a 35.0% equity interest. Coca-Cola FEMSA mainly purchases its glass bottles from Vitro America, S. de R.L. de C.V. (formerly Compañía Vidriera, S.A. de C.V., or Vitro), FEVISA Industrial, S.A. de C.V., known as FEVISA, and Glass & Silice, S.A. de C.V., or SIVESA.

Coca-Cola FEMSA purchases sugar from, among other suppliers, PIASA and Beta San Miguel, S.A. de C.V., both sugar cane producers in which, as of April 7, 2017, it held a 36.4% and 2.7% equity interest, respectively. Coca-Cola FEMSA purchases HFCS from Ingredion México, S.A. de C.V., Almidones Mexicanos, S.A. de C.V., known as Almex and Cargill de México, S.A. de C.V.

Sugar prices in Mexico are subject to local regulations and other barriers to market entry that cause Coca-Cola FEMSA to pay higher prices than those paid in the international market. As a result, prices in Mexico have no correlation to international market prices. In 2016, sugar prices in local currency in Mexico increased approximately 25.0% as compared to 2015.

In Central America, the majority of Coca-Cola FEMSA’s raw materials such as glass and plastic bottles are purchased from several local suppliers. Coca-Cola FEMSA purchases all of its cans from PROMESA. Sugar is available from suppliers that represent several local producers. In Costa Rica, Coca-Cola FEMSA acquires plastic non-returnable bottles from Alpla C.R. S.A., and in Nicaragua Coca-Cola FEMSA acquires such plastic bottles from Alpla Nicaragua, S.A.

 

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South America (excluding Venezuela) . In Colombia, Coca-Cola FEMSA uses sugar as a sweetener in most of its products, which Coca-Cola FEMSA buys from several domestic sources. Sugar prices in Colombia increased approximately 15.0% in U.S. dollars and 27.0% in local currency, as compared to 2015. Coca-Cola FEMSA purchases plastic bottles from Amcor Rigid Plastics de Colombia, S.A. and Tapón Corona de Colombia S.A. (affiliate of Envases Universales de México, S.A.P.I. de C.V.). Coca-Cola FEMSA has historically purchased all of its glass bottles from Peldar O-I; however, Coca-Cola FEMSA has engaged new suppliers and has acquired glass bottles from Al Tajir and Frigoglass in both cases from the United Arab Emirates. Coca-Cola FEMSA purchases all of its cans from Crown Colombiana, S.A. and Envases Universales de México, S.A.P.I. de C.V. Grupo Ardila Lulle, owners of Coca-Cola FEMSA’s competitor Postobón, own a minority equity interest in Peldar O-I and Crown Colombiana, S.A.

Sugar is available in Brazil at local market prices, which historically have been similar to international prices. Sugar prices in Brazil increased approximately 36.0% in U.S. dollars and increased 42.0% in local currency as compared to 2015. Taking into account Coca-Cola FEMSA’s financial hedging activities, Coca-Cola FEMSA’s sugar prices in Brazil decreased approximately 21.0% in U.S. dollars and decreased 16.0% in local currency as compared to 2015. Coca-Cola FEMSA purchases glass bottles, plastic bottles and cans from several domestic and international suppliers.

In Argentina, Coca-Cola FEMSA mainly use HFCS that it purchases from several different local suppliers as a sweetener in its products. Coca-Cola FEMSA purchases glass bottles, plastic cases and other raw materials from several domestic sources. Coca-Cola FEMSA purchases plastic preforms, as well as returnable plastic bottles, at competitive prices from Andina Empaques S.A., a local subsidiary of Embotelladora Andina, S.A., a Coca-Cola bottler with operations in Chile, Argentina, Brazil and Paraguay, and other local suppliers. Coca-Cola FEMSA also acquires plastic preforms from Alpla Avellaneda, S.A. and other suppliers, such as AMCOR Argentina.

Venezuela . In Venezuela, Coca-Cola FEMSA uses sugar as a sweetener in all of its caloric beverages, which Coca-Cola FEMSA purchases mainly from the local market. Since 2003, from time to time, Coca-Cola FEMSA has experienced a sugar shortage due to lower domestic production and the inability of the predominant sugar importers to obtain permission to import in a timely manner. Because sugar distribution to the food and beverages industry and to retailers is controlled by the government, Coca-Cola FEMSA experienced material disruptions during 2016 with respect to access to sufficient sugar supply. For this reason, in 2016 Coca-Cola FEMSA decided to adjust its product portfolio from caloric beverages to non-caloric beverages. We cannot assure you that Coca-Cola FEMSA will not continue to experience disruptions in its ability to meet its sugar requirements in the future should the Venezuelan government continue to impose restrictive measures. Coca-Cola FEMSA buys glass bottles from one local supplier, Productos de Vidrio, C.A., the only supplier authorized by The Coca-Cola Company. Coca-Cola FEMSA acquires most of its plastic non-returnable bottles from Alpla de Venezuela, S.A. and most of its aluminum cans from a local producer, Dominguez Continental, C.A.

Under current regulations promulgated by the Venezuelan authorities, Coca-Cola FEMSA’s ability and that of its suppliers to import some of the raw materials and other supplies used in its production could be limited, and access to the official exchange rate for these items, including, among others, concentrate, resin, aluminum, plastic caps, distribution trucks and vehicles is only achieved by obtaining proper approvals from the relevant authorities.

FEMSA Comercio

Overview

FEMSA Comercio operates through the following divisions:

 

   

Retail Division : operates the largest chain of small-format stores in Mexico, measured in terms of number of stores as of December 31, 2016, mainly under the trade name “OXXO.” As of December 31, 2016, the Retail Division operated 15,225 OXXO stores, of which 15,160 are located throughout Mexico and the remaining 65 OXXO stores are located in Colombia.

 

   

Health Division : operates drugstores and related operations with 2,120 points of sale in Mexico, Chile and Colombia as of December 31, 2016.

 

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Fuel Division : operates retail service stations for fuels, motor oils and other car care products. As of December 31, 2016, the Fuel Division operated 382 service stations, concentrated mainly in the northern part of Mexico with a presence in 16 different states throughout the country.

Operations by Division—Overview

Year Ended December 31, 2016

 

     (in millions of Mexican pesos, except
percentages)
 
     Total Revenues     Gross Profit  
     2016      2016 vs.
2015 (1)(2)
    2016      2016 vs.
2015 (1)(2)
 

Retail Division

     Ps. 137,139        14.4     Ps. 50,990        16.8

Health Division

     43,411        232.6     12,738        245.4

Fuel Division

     28,616        54.6     2,248        58.3
  

 

 

    

 

 

   

 

 

    

 

 

 

 

(1) The operations that compose the Health Division have been treated as a separate reportable segment since 2016.
(2) Includes the Group Socofar’s operations recorded since October 2015.

Corporate History

Retail Division

FEMSA’s retail business started in 1978 with the opening of two OXXO stores in Monterrey, Nuevo Leon, one store in Mexico City and another store in Guadalajara, Jalisco. The motivating factor behind FEMSA’s entrance into the retail industry was to enhance beer sales through company-owned retail outlets as well as to gather information on customer preferences.

In 1994, FEMSA Comercio consolidated its retail business into an independent business unit, and by 1998, it reached 1,000 OXXO stores in Mexico. By 2007, the store count surpassed 5,000 across Mexico, and in 2009, OXXO entered Colombia, where it has continued expanding its presence. Currently, there are 65 OXXO stores in Colombia.

In December 2013, FEMSA Comercio, through one of its subsidiaries, purchased the operating assets and trademarks of Doña Tota, a leading quick-service restaurant operator in Mexico. The founding shareholders of Doña Tota hold a 20% stake in the FEMSA Comercio subsidiary that now operates the Doña Tota business.

In January 2016, in order to explore the fast casual dining industry in the United States, FEMSA Comercio, through its subsidiary Cadena Comercial USA, completed the acquisition of an 80% economic stake in Specialty’s, which then operated 56 café restaurants in the states of California, Washington and Illinois. In January 2017, Cadena Comercial USA completed the acquisition of the remaining 20% economic stake in Specialty’s becoming its sole owner.

In June 2016, the Retail Division, through its subsidiary Cadena Comercial Andina, SpA, acquired Big John, a leading convenience store operator based in Santiago, Chile. At the time of the acquisition, Big John operated 49 stores, mainly in the Santiago metropolitan area. In March 2017, the Retail Division opened its first OXXO store in Chile.

Health Division

Leveraging FEMSA Comercio’s capabilities and skills in successfully operating small-box retail formats, in May 2013, FEMSA Comercio, through its subsidiary CCF, closed the acquisition of Farmacias YZA, a leading drugstore operator in Southeast Mexico, headquartered in Merida, Yucatan, to create another avenue for growth for FEMSA Comercio. The founding shareholders of Farmacias YZA hold a 25% stake in CCF.

 

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In a separate transaction, on May 13, 2013, CCF acquired Farmacias FM Moderna, a leading drugstore operator in the western state of Sinaloa.

In June 2015, CCF acquired 100% of Farmacias Farmacon, a regional pharmacy chain consisting at the time of the transaction of more than 200 stores in the northwestern Mexican states of Sinaloa, Sonora, Baja California and Baja California Sur.

In September 2015, the Retail Division acquired 60% of Socofar, a leading South American drugstore operator based in Santiago, Chile. Socofar operated, directly and through franchises, at that time, more than 600 drugstores and 150 beauty stores throughout Chile and 150 drugstores throughout Colombia.

In June 2016, CCF acquired 100% of Farmacias Generix, a regional pharmacy chain consisting at the time the transaction of 70 drugstores in the Mexican states of Jalisco, Guanajuato, Mexico City, Queretaro and Nuevo Leon.

In July 2016, Sofocar through one of its subsidiaries, Drogueria y Farmacias Cruz Verde S.A.S., acquired 100% of Farmacias Acuña, a regional pharmacy chain consisting at the time of 51 drugstores in Colombia.

Fuel Division

Since 1995, FEMSA Comercio has provided operational and administrative services for gasoline service stations through agreements with third parties, using the commercial brand “OXXO GAS.” Over time, this brand has become synonymous of quality service among our customers, and revenues per service station have consistently grown. Historically, Mexican legislation precluded FEMSA Comercio from participating in the retail of gasoline, and therefore from owning PEMEX franchises, due to FEMSA’s foreign institutional investor base. In March 2015, following changes to the legal framework and considering the potential expansion and synergies arising from this business as part of Mexico’s energy reform, FEMSA Comercio began to acquire and lease PEMEX’s service station franchises and to obtain permits to operate each of the franchises.

Retail Division

Business Strategy

The Retail Division intends to continue increasing its store base while capitalizing on the retail business and market knowledge gained at existing stores. We intend to open new stores in locations where we believe there is high growth potential or unsatisfied demand, while also increasing customer traffic and average ticket per customer in existing stores. Our expansion focuses on both entering new markets and strengthening our presence nationwide and across different income levels of population. A fundamental element of the Retail Division’s business strategy is to leverage its retail store formats, know-how, technology and operational practices to continue growing in a cost-effective and profitable manner. This scalable business platform is expected to provide a strong foundation for continued organic growth, improving traffic and average ticket sales at our existing stores and facilitating entry into new small-format retail industries.

The Retail Division has developed proprietary models to assist in identifying appropriate store locations, store formats and product categories. These models utilize location-specific demographic data and the Retail Division’s experience in similar locations to fine-tune the store formats, product price ranges and product offerings to the target market. Market segmentation is becoming an important strategic tool that is expected to allow the Retail Division to improve the operating efficiency of each location, cover a wider array of consumption occasions and increase its overall profitability.

 

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The Retail Division continues to improve its information gathering and processing systems to allow it to connect with its customers at all levels and anticipate and respond efficiently to their changing demands and preferences. Most of the products carried through OXXO stores are bar-coded, and all OXXO stores are equipped with point-of-sale systems integrated into a company-wide computer network. To implement more effective business strategies, the Retail Division created a department in charge of product category management, for products such as beverages, fast food and perishables, responsible for analyzing data gathered to better understand our customers, develop integrated marketing plans and allocate resources more efficiently. This department utilizes a technology platform supported by an enterprise resource planning (ERP) system, as well as other technological solutions such as merchandising and point-of-sale systems, which allow the Retail Division to redesign and adjust its key operating processes and certain related business decisions. Our IT system also allows us to manage each store’s working capital, inventories and investments in a cost-effective way while maintaining high sales volume and store quality. Supported by continued investments in IT, our supply chain network allows us to optimize working capital requirements through inventory rotation and reduction, reducing out-of-stock days and other inventory costs.

The Retail Division has adopted innovative promotional strategies in order to increase store traffic and sales. In particular, the OXXO stores sell high-frequency items such as beverages, snacks and cigarettes at competitive prices. The Retail Division’s ability to implement this strategy profitably is partly attributable to the size of the OXXO stores chain, as such division is able to work together with its suppliers to implement their revenue-management strategies through differentiated promotions. OXXO stores’ national and local marketing and promotional strategies are an effective revenue driver and a means of reaching new segments of the population while strengthening the OXXO brand. For example, the organization has refined its expertise in executing cross promotions (discounts on multi-packs or sales of complementary products at a special price) and targeted promotions to attract new customer segments by expanding the offerings in the grocery product category in certain stores.

Another fundamental element of our strategy consists of leveraging our reputation for quality and the position of our brand in the minds of our customers to expand our offering of private-label products. Our private-label products represent an alternative for value-conscious consumers, which, combined with our market position, allows the Retail Division to increase sales and margins, strengthen customer loyalty and bolster its bargaining position with suppliers.

Historically, the Retail Division has represented an effective distribution channel for our beverage products, as well as a rapidly growing point of contact with our consumers. Based on the belief that location plays a major role in the long-term success of a retail operation such as a small-format store, as well as a role in our ability to accelerate and streamline the new-store development process, the Retail Division has focused on a strategy of rapid, profitable growth.

Finally, to further increase customer traffic into our stores, the Retail Division has incorporated additional services, such as utility bill payment, deposits into bank accounts held at our correspondent bank partners, remittances, prepayment of mobile phone fees and charges and other financial services, and it constantly increases the services offered in its stores.

Store Locations

With 15,160 OXXO stores in Mexico and 65 OXXO stores in Colombia as of December 31, 2016, the Retail Division operates the largest small-format store chain in the Americas measured by number of stores. The Retail Division has expanded its operations by opening 1,145 net new OXXO stores in Mexico and 19 in Colombia during 2016.

 

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OXXO Stores

Regional Allocation in Mexico and Latin America (*)

as of December 31, 2016

 

LOGO

The Retail Division has aggressively expanded its number of OXXO stores over the past several years. The average investment required to open a new OXXO store varies, depending on location and format and whether the store is opened in an existing retail location or requires construction of a new store. The Retail Division is generally able to use supplier credit to fund the initial inventory of new OXXO stores.

 

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OXXO Stores

Total Growth

 

     Year Ended December 31,  
     2016     2015     2014     2013     2012  

Total OXXO stores

     15,225       14,061       12,853       11,721       10,601  

Store growth (% change over previous year)

     8.3     9.4     9.7     10.6     10.9

The Retail Division currently expects to continue implementing its expansion strategy by emphasizing growth in areas of high economic potential in existing markets and by expanding in underserved and unexploited markets.

Most of the OXXO stores are operated under lease agreements, which are denominated in Mexican peso and adjusted annually to an inflation index. This approach provides the Retail Division the flexibility to adjust locations as cities grow and effectively adjust its footprint based on stores’ performance.

The identification of locations and pre-opening planning in order to optimize the results of new OXXO stores are important elements in the Retail Division’s growth plan. The Retail Division continuously reviews store performance against certain operating and financial benchmarks to optimize the overall performance of the chain. Stores of the Retail Division that are unable to maintain benchmark standards are generally closed. Between December 31, 2012 and 2016, the total number of OXXO stores increased by 4,624, which resulted from the opening of 4,844 new stores and the closing of 220 stores.

Competition

The Retail Division, mainly through OXXO stores, competes in the overall retail market, which we believe is highly competitive. OXXO stores face competition from small-format stores like 7-Eleven, Circle K stores and other numerous chains of retailers across Mexico, from other regional small-format retailers to small informal neighborhood stores. OXXO competes both for consumers and for new locations for stores and human resources to operate those stores. The Retail Division operates in each state in Mexico and has a much broader geographic coverage than any of its competitors in Mexico.

Market and Store Characteristics

Market Characteristics

The Retail Division is placing increased emphasis on market segmentation and differentiation of store formats to more appropriately serve the needs of customers on a location-by-location basis. The principal segments include residential neighborhoods, commercial and office locations and stores near schools and universities, along with other types of specialized locations.

Approximately 59% of OXXO stores’ customers are between the ages of 15 and 35. The Retail Division also segments the market according to demographic criteria, including income level.

OXXO Store Characteristics

The average size of an OXXO store is approximately 104 square meters of selling space, excluding space dedicated to refrigeration, storage or parking. The average constructed area of a store is approximately 188 square meters and, when parking areas are included, the average store size is approximately 415 square meters. In 2016, a typical OXXO store carried an average of 3,105 different stock keeping units (SKUs) in 31 main product categories.

 

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Retail Division —Operating Indicators

 

     Year Ended December 31,  
     2016     2015     2014     2013     2012  
          

(percentage increase compared to

previous year)

 

Total Retail Division revenues (1)

     14.4     21.2 % (3)       12.4     12.9     16.6

OXXO same-store sales (2)

     7.0     6.9     2.7     2.4     7.7

 

(1) Includes revenues of Big John. See “Item 4. Information on the Company—Corporate Background” and Note 4 to our audited consolidated financial statements.
(2) Same-store sales growth is calculated by comparing the sales of stores for each year that have been in operation for more than 12 months with the sales of those same stores during the previous year.
(3) Includes revenues of Farmacias Farmacon from June 2015 and Socofar from October 2015. See “Item 4. Information on the Company – Corporate Background” and Note 4 to our audited consolidated financial statements. We have restated 2015 information by segment in our consolidated financial statements for comparative purposes. Otherwise, the percentage is compared as reported last year.

Beer, cigarettes, soft drinks and other beverages and snacks represent the main product categories for OXXO stores. The Retail Division has a distribution agreement with Cuauhtémoc Moctezuma, pursuant to which OXXO stores only carry beer brands produced and distributed by Cuauhtémoc Moctezuma. OXXO stores will continue to benefit from the existing relationship under which Cuauhtémoc Moctezuma will continue to be the exclusive supplier of beer to OXXO until June 2020.

Approximately 56% of OXXO stores are operated by independent managers responsible for all aspects of store operations. The store managers are commission agents and are not employees of the Retail Division. Each store manager is the legal employer of the store’s staff, which typically numbers six people per store. The Retail Division continually invests in on-site operating personnel, with the objective of promoting loyalty, customer service and low personnel turnover in the stores.

Advertising and Promotion

The Retail Division’s marketing efforts for OXXO stores include both specific product promotions and image advertising campaigns. These strategies seek to increase store traffic and sales, and to reinforce the OXXO name and market position.

The Retail Division manages its advertising for OXXO stores on three levels depending on the nature and scope of the specific campaign: local or store-specific, regional and national. Store-specific and regional campaigns are closely monitored to ensure consistency with the overall corporate image of OXXO stores and to avoid conflicts with national campaigns. The Retail Division primarily uses point of purchase materials, flyers, handbills and print and radio media for promotional campaigns, although television is used occasionally for the introduction of new products and services. The OXXO store chain’s image and brand name are presented consistently across all stores, irrespective of location.

Inventory and Purchasing

The Retail Division has placed considerable emphasis on improving operating performance. As part of these efforts, the Retail Division continues to invest in extensive information management systems to improve inventory management. Electronic data collection has enabled this division to reduce average inventory levels. Inventory replenishment decisions are carried out on a store-by-store basis.

Management believes that the OXXO store chain’s scale of operations provides the Retail Division with a competitive advantage in its ability to realize strategic alliances with suppliers. General category offerings are determined on a national level, although purchasing decisions are implemented on a local, regional or national level, depending on the nature of the product category. Given the fragmented nature of the retail industry in Mexico in general, Mexican producers of beer, soft drinks, bread, dairy products, snacks, and other high-frequency products have established proprietary distribution systems with extensive direct distribution routes. As a result, approximately 59% of the OXXO store chain’s total sales consist of products that are delivered directly to the stores by suppliers. Other products with longer shelf lives are distributed to stores by the Retail Division’s distribution system, which includes 17 regional warehouses located in Monterrey, Guadalajara, Mexicali, Merida, Leon, Obregon, Puebla, Queretaro, Chihuahua, Reynosa, Saltillo, Tijuana, Toluca, Veracruz, Villahermosa and two in Mexico City. Our logistics services subsidiary operates a fleet of approximately 978 trucks that make deliveries from the distribution centers to each store approximately twice per week.

 

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Seasonality

OXXO stores experience periods of high demand in December, as a result of the holidays, and in July and August, as a result of increased consumption of beer and soft drinks during the hot summer months. The months of November and February are generally the weakest sales months for OXXO stores. In general, colder weather during these months reduces store traffic and consumption of cold beverages.

Quick-Service Restaurant Market

Following the rationale that the Retail Division has developed certain capabilities and skills that should be well suited to different types of small-format retail, in 2013 the Retail Division entered the quick-service restaurant market in Mexico through the 80% acquisition of Doña Tota, with the founding shareholders retaining 20%. This is a leading regional chain specializing in Mexican food with a particularly strong presence in the northeast of the country. This acquisition presented the Retail Division with the opportunity to grow Doña Tota’s stand-alone store base across the country, as well as the possibility to acquire prepared food capabilities and expertise.

In January 2016, in order to explore the fast casual dining industry in the United States, FEMSA Comercio, through its subsidiary Cadena Comercial USA, completed the acquisition of an 80% economic stake in Specialty’s, which operated 56 café restaurants in California, Washington and Illinois, as of that date. In January 2017, Cadena Comercial USA completed the acquisition of the remaining 20% economic stake in Specialty’s becoming its sole owner.

Other Stores

The Retail Division also operates other small-format stores, which include soft discount stores with a focus on perishables and liquor stores.

Health Division

Business Strategy

The Health Division’s vision is focused on two main strategies: first, to gain relevant scale by building a Latin American pharmacy retail platform that operates across several countries and markets, and second, to constantly improve our value proposition and service by being closer to our customers and by giving them access to a broader assortment, better options and availability of required medications, as well as relevant health and wellness products and services. In order to achieve this, the Health Division is working on leveraging two strong capability sets: i) the Health-industry marketing and operational skills acquired through the incorporation of Chile-based Socofar, and ii) the skills that FEMSA Comercio has developed in the operation and growth of other small retail formats, particularly in Mexico. These capabilities include commercial, marketing and production skills as well as site selection, logistics, business processes, human resources, inventory and supplier management.

The drugstore market in Mexico is still fragmented, and FEMSA Comercio believes it is well equipped to create value by growing further in this market and by playing a value-creating role in its long-term consolidation. Furthermore, the acquisition of Socofar gives FEMSA Comercio the opportunity to pursue a regional strategy across South America from a solid platform anchored in the Chilean market and with compelling growth opportunities in Colombia and beyond.

 

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Store Locations

As of December 31, 2016, the Health Division operates 2,120 points of sale, including 1,077 in Mexico, 873 in Chile and 170 in Colombia.

During 2016, the Health Division expanded its operations by 220 additional stores. The average investment required to open a new store varies, depending on location and whether the store is opened in an existing store location or requires construction of a new store. The Health Division currently expects to continue implementing its expansion strategy by emphasizing growth in markets where it currently operates and by expanding in underserved and unexploited markets. Most of the drugstore-related real estate is operated under lease agreements.

Competition

The Health Division competes in the overall pharmacy services market, which we believe is highly competitive. Our stores face competition from other drugstore chains, independent pharmacies and supermarkets, online retailers, and convenience stores. The biggest chains competing with the Health Division in Mexico in terms of number of drugstores are Farmacias Guadalajara, Farmacias del Ahorro and Farmacias Benavides, while in Chile, the biggest chains are Farmacias Ahumada and Salcobrand. In Colombia, Copidrogas, La Rebaja, Colsubsidio, Olimpica, and Cafam are relevant players.

Market and Store Characteristics

Market Characteristics

The drugstore market in Mexico is highly fragmented among national and regional chains as well as independent drugstores, supermarkets and other informal neighborhood drugstores. There are more than 29,000 drugstores; however, the Health Division only has 3.6% of the total number of pharmacies in Mexico with a presence in 15 of 32 states in the country.

The market in Colombia is similar but slightly less fragmented and in general includes national and regional chains. The national healthcare system in Colombia covers a large amount of the country’s population and works through Entidades Promotoras de Salud (Health Promoting Entities) in the private and public sectors to provide healthcare services to the Colombian population.

In Chile, the market is more concentrated among a limited number of participants and our operation is the leading drugstore operator in the country in terms of number of stores. Our operation also is the largest distributor of pharmaceuticals in the country. The Chilean market, where our operation’s healthcare services are shared by both institutional and personal consumers, represents an attractive growth opportunity.

The Health Division is placing increased emphasis on market segmentation and differentiation of store formats to more appropriately serve the needs of customers on a location-by-location basis, selecting sites with the greatest proximity to the customers.

The Health Division’s customers are aged 18 and above, however 65% are between the ages of 26 and 55. Additionally, 58% of the Health Division’s customers are female. The Health Division also segments the market according to demographic criteria, including income level and purchase frequency.

Store Characteristics

The Health Division’s stores are operated under the following trade names: Farmacias YZA, Farmacias Moderna, Farmacias Farmacon and Farmacias Generix in Mexico; Farmacias Cruz Verde in Chile and Colombia and beauty stores under the trade name Maicao in Chile. The average size of the Health Division’s stores is 80 square meters in Mexico, 150 square meters in Chile and 89 square meters in Colombia, including selling space and storage area. On average, each store has between 6 and 11 employees depending on the size of and traffic into the store. Patented and generic pharmaceutical drugs, beauty products, medical supplies, household goods and personal care products are the main products sold at the Health Division’s stores.

 

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The Health Division’s stores also offer different value-added services, such as correspondent banking, product delivery services, medical examinations and some financial services in Chile.

Advertising and Promotion

The Health Division’s marketing efforts for its stores include both specific product promotions and image advertising campaigns. These strategies seek to increase store traffic and sales, and to reinforce the brands and market positions. In Chile, sanitary law forbids advertising of pharmaceutical products through mass media. Nevertheless, it is possible to advertise OTC products using point of purchase materials, flyers and print catalogs. Television, radio, newspapers and digital media are used in seasonal and promotional campaigns.

Inventory and Purchasing

The South American operations of our Health Division seek to align the purchasing and logistics process with consumer needs. A key competitive advantage is our strong logistics chain, which relies on an integrated view of the supply chain. In Chile, we operate 4 distribution centers, the largest of which is a modern distribution center with advanced technology that services 1,500 stores and healthcare institution customers throughout the country. Of the remaining distribution centers one provides exclusive service to our beauty stores, one serves institutional customers and one focuses on high volume products. In Colombia, we operate one distribution center that distributes products to all our locations throughout the country.

In Mexico, we continue to integrate the companies we have acquired into a single model of operation and have built 2 distribution centers. One distribution center serves a significant part of the needs of stores located in the north of Mexico, while the second distribution center provides service to stores located in the south. The distribution of some products in Mexico still relies on third-party distributors.

Seasonality

The Health Division’s sales can be seasonal in nature with pharmaceutical drug sales affected by the timing and severity of the cough, cold and flu season. Revenues tend to be higher during the winter season but can be offset by extreme weather due to the rainy season in certain regions of Mexico in December and January. Revenues in our Chilean operation tend to be higher during December, driven by the Christmas season, mainly due to an increase in the purchase of beauty and personal care products to be given away; otherwise, early in the year during January and February, revenues tend to fall slightly, mainly driven by the holiday period.

Fuel Division

Business Strategy

A fundamental element of the Fuel Division’s business strategy is to increase at an accelerated rate its offering of service stations, in previously identified regions in Mexico, by way of leases, procurement or construction of stations.

The Fuel Division’s business strategy aims to strengthen its services in its retail gas stations in Mexico to fulfill consumers’ needs and increase traffic in those service stations while developing and maintaining an attractive value proposition to draw potential customers and face the future entry of new competitors in the industry. Furthermore, the Fuel Division’s service stations often have an OXXO store on the premises, strengthening the OXXO brand and complementing the value proposition.

The Fuel Division’s business strategy includes the analysis and potential development of new businesses in the fuel value chain, such as the final distribution and wholesale of fuel to its own service stations and to third parties.

 

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Service Station Locations

As of December 31, 2016, the Fuel Division operated 382 service stations, concentrated mainly in the northern part of the country but with a presence in 16 different states throughout Mexico.

In 2016, the Fuel Division leased 70 additional service stations and built 5 new service stations.

Competition

Despite the existence of other groups competing in this sector, the Fuel Division’s main competitors are small retail service station chains owned by regional family businesses, which compete in the aggregate with the Fuel Division in total sales, new station locations and labor. The biggest chains competing with the Fuel Division in terms of number of service stations are Petro-7, operated by 7-Eleven Mexico; Corpo Gas; Hidrosina and Orsan.

Market and Store Characteristics

Market Characteristics

The retail service station market in Mexico is highly fragmented. There are currently approximately 11,500 service stations; however, the Fuel Division, with approximately 3.3% of the total number of stations, is the largest participant in this market. The majority of the retail service stations in the country are owned by small regional family businesses.

Service Station Characteristics

Each service station under the “OXXO GAS” trade name comprises offices, parking lots, a fuel service area and an area for storage of gasoline in underground tanks. We are in an ongoing effort to re-brand some of our service stations with a new image featuring the trademark of OXXO GAS. This change will undoubtedly allow customers to more easily identify our service stations in the market. The average size of the fuel service dispatch area is 250 square meters. On average, each service station has 13 employees.

Gasoline, diesel, oil and additives are the main products sold at OXXO GAS service stations.

Up until April of 2016, legal restrictions prevented the Fuel Division, as a franchisee of PEMEX, from having a different supplier of gasoline. However, the current law allows other suppliers to operate in Mexico.

Advertising and Promotion

Through promotional activities, the Fuel Division seeks to provide additional value to customers by offering, along with gasoline, oils and additives, quality products and services at affordable prices. The best tool for communicating these promotions has been coupon promotions in partnership with third parties.

Seasonality

The Fuel Division experiences especially high demand during the months of May and August. The lowest demand is in January and December due to the rainy season and the year-end holiday period, because most service stations are not located on highways to holiday destinations.

Equity Investment in the Heineken Group

As of December 31, 2016, FEMSA owned a non-controlling interest in the Heineken Group, one of the world’s leading brewers. As of December 31, 2016, our 20% economic interest in the Heineken Group comprised 43,018,320 shares of Heineken Holding N.V. and 72,182,203 shares of Heineken N.V. For 2016, FEMSA recognized equity income of Ps. 6,342 million regarding its 20% economic interest in the Heineken Group; see Note 10 to our audited consolidated financial statements.

 

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As described above, the Retail Division has a distribution agreement with subsidiaries of Cuauhtémoc Moctezuma, now a part of the Heineken Group, pursuant to which OXXO stores in Mexico only carry beer brands produced and distributed by Cuauhtémoc Moctezuma. OXXO stores will continue to benefit from the existing relationship under which Cuauhtémoc Moctezuma will continue to be the exclusive supplier of beer to OXXO until June 2020. Coca-Cola FEMSA also agreed with Cervejarias Kaiser (also now part of the Heineken Group) to continue to distribute and sell the Kaiser beer portfolio in Coca-Cola FEMSA’s Brazilian territories for a 20-year term beginning in 2003, consistent with the arrangement already in place. In addition, our logistic services subsidiary provides certain services to Cuauhtémoc Moctezuma and its subsidiaries.

Other Businesses

Our other businesses consist of the following smaller operations that support our core operations:

 

   

Our logistics services subsidiary provides a broad range of logistics and vehicle maintenance services to Coca-Cola FEMSA, FEMSA Comercio and third-party clients in the beverages, consumer products and retail industries. It has operations in Mexico, Brazil, Colombia, Panama, Costa Rica, Nicaragua and Peru.

 

   

Our refrigeration business produces vertical and horizontal commercial refrigerators for the soft drink, beer and food industries, with an annual capacity of 547,584 units at December 31, 2016. In 2016, this business sold 486,037 refrigeration units, 21% of which were sold to Coca-Cola FEMSA, and the remainder of which were sold to other clients. Also, this business includes manufacturing operations for food processing, storage and weighing equipment.

Description of Property, Plant and Equipment

As of December 31, 2016, Coca-Cola FEMSA owned all of its manufacturing facilities and distribution centers, consisting primarily of production and distribution facilities for its soft drink operations and office space. In addition, the Retail Division owns approximately 12% of OXXO stores, while the remaining stores are located on leased properties and substantially almost all of its warehouses are under long-term lease arrangements with third parties. The Health Division owns 7 distribution centers, 4 of which are in Chile, 2 in Mexico, and 1 in Colombia, and also includes a manufacturing facility for generic pharmaceuticals in Chile. Most of the Health Division’s stores are under lease arrangements with third parties.

The table below summarizes by country the installed capacity and percentage utilization of Coca-Cola FEMSA’s production facilities:

Bottling Facility Summary

As of December 31, 2016

 

Country

   Installed  Capacity
(thousands of unit cases)
     Utilization (1)  (2)
(%)
 

Mexico

     2,712,271        66  

Guatemala

     43,237        76  

Nicaragua

     64,795        79  

Costa Rica

     81,200        59  

Panama

     63,343        54  

Colombia

     613,011        49  

Venezuela

     235,862        51  

Brazil (3)

     1,201,791        57  

Argentina

     366,613        54  

 

(1) Calculated based on each bottling facility’s theoretical capacity assuming total available time in operation and without taking into account ordinary interruptions, such as planned downtime for preventive maintenance, repairs, sanitation, set-ups and changeovers for different flavors and presentations. Additional factors that affect utilization levels include seasonality of demand for our products, supply chain planning due to different geographies and different packaging capacities.
(2) Annualized rate.
(3) Includes the installed capacity and utilization of Coca-Cola FEMSA’s plant located in Porto Real up to October 2016, when the plant was shut down to achieve cost efficiencies and expected synergies.

 

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The table below summarizes by country plant location and facility area of Coca-Cola FEMSA’s production facilities:

Bottling Facility by Location

As of December 31, 2016

 

Country

  

Plant

   Facility Area  
          (thousands
of sq. meters)
 

Mexico

  

San Cristobal de las Casas, Chiapas

     45  
  

Cuautitlan, Estado de Mexico

     35  
  

Los Reyes la Paz, Estado de Mexico

     50  
  

Toluca, Estado de Mexico

     317  
  

Leon, Guanajuato

     124  
  

Morelia, Michoacan

     50  
  

Ixtacomitan, Tabasco

     117  
  

Apizaco, Tlaxcala

     80  
  

Coatepec, Veracruz

     142  
  

La Pureza Altamira, Tamaulipas

     300  
  

Poza Rica, Veracruz

     42  
  

Pacifico, Estado de Mexico

     89  
  

Cuernavaca, Morelos

     37  
  

Toluca, Estado de Mexico (Ojuelos)

     41  
  

San Juan del Rio, Queretaro

     84  
  

Queretaro, Queretaro

     80  
  

Cayaco, Acapulco

     104  

Guatemala

  

Guatemala City

     46  

Nicaragua

  

Managua

     54  

Costa Rica

  

Calle Blancos, San Jose

     52  
  

Coronado, San Jose

     14  

Panama

  

Panama City

     29  

Colombia

  

Barranquilla

     37  
  

Bogota, DC

     105  
  

Bucaramanga

     26  
  

Cali

     76  
  

Manantial, Cundinamarca

     67  
  

Tocancipa

     298  
  

Medellin

     47  

Venezuela

  

Antimano

     15  
  

Barcelona

     141  
  

Maracaibo

     68  
  

Valencia

     100  

Brazil

  

Campo Grande

     36  
  

Jundiai

     191  
  

Mogi das Cruzes

     119  
  

Maringa

     160  
  

Marilia

     159  
  

Curitiba

     119  
  

Bauru

     39  
  

Itabirito

     320  
  

Antonio Carlos

     1,519  
  

Porto Alegre

     196  
  

Santo Angelo

     43  

Argentina

  

Alcorta, Buenos Aires

     73  
  

Monte Grande, Buenos Aires

     32  

 

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Insurance

We maintain an “all risk” insurance policy covering our properties (owned and leased), machinery and equipment and inventories as well as losses due to business interruptions. The policy covers damages caused by natural disaster, including hurricane, hail, earthquake and damages caused by human acts, including explosion, fire, vandalism and riot. We also maintain a freight transport insurance policy that covers damages to goods in transit. In addition, we maintain a liability insurance policy that covers product liability. We purchase our insurance coverage through an insurance broker. In 2016, the policies for “all risk” property insurance were issued by Chubb de México, Compañía de Seguros, S.A. de C.V., policies for liability insurance were issued by Mapfre Tepeyac Seguros, S.A., and the policy for freight transport insurance was issued by AXA Seguros, S.A. de CV. Our “all risk” coverage was partially reinsured in the international reinsurance market. We believe that our coverage is consistent with the coverage maintained by similar companies.

Capital Expenditures and Divestitures

Our consolidated capital expenditures, net of disposals, for the years ended December 31, 2016, 2015 and 2014 were Ps. 22,155 million, Ps. 18,885 million and Ps. 18,163 million respectively, and were for the most part financed from cash from operations generated by our subsidiaries. These amounts were invested in the following manner:

 

    Year Ended December 31,  
    2016     2015     2014  
    (in millions of Mexican pesos)  

Coca-Cola FEMSA

  Ps. 12,391     Ps. 11,484     Ps. 11,313  

FEMSA Comercio

     

Retail Division

    7,632       5,625       5,191  

Health Division

    474       423       —    

Fuel Division

    299       228       —    

Other

    1,359       1,125       1,659  
 

 

 

   

 

 

   

 

 

 

Total

  Ps. 22,155     Ps. 18,885     Ps. 18,163  

Coca-Cola FEMSA

In 2016, Coca-Cola FEMSA focused its capital expenditures on investments in (i) increasing production capacity; (ii) placing coolers with retailers; (iii) returnable bottles and cases; (iv) improving the efficiency of our distribution infrastructure; and (v) information technology. Through these measures, Coca-Cola FEMSA continuously seeks to improve its profit margins and overall profitability.

 

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FEMSA Comercio

Retail Division

The Retail Division’s principal investment activity is the construction and opening of new stores, which are mostly OXXO Stores. During 2016, FEMSA Comercio opened 1,164 net new OXXO stores. The Retail Division invested Ps. 7,632 million in 2016 in the addition of new stores, warehouses and improvements to leased properties.

Health Division

The Health Division’s principal investment activity is the construction and opening of new drugstores in the countries where we operate. During 2016, the Health Division opened 74 net new drugstores in Mexico and 25 net new drugstores in Chile and Colombia. The Health Division invested Ps. 474 million in 2016 in the addition of new stores, warehouses and improvements to leased properties.

Fuel Division

In 2016, the Fuel Division’s business addressed its investments on capital expenditure mainly to the addition of 75 new retail service stations. During 2016, the Fuel Division invested Ps. 299 million.

Regulatory Matters

Antitrust Legislation

The Ley Federal de Competencia Económica (Federal Antitrust Law) regulates monopolistic practices in Mexico and requires approval of certain mergers and acquisitions. The Federal Antitrust Law subjects the activities of certain Mexican companies, including us, to regulatory scrutiny. The Comisión Federal de Competencia Económica (Federal Antitrust Commission, or the COFECE) is the Mexican antitrust authority, which has constitutional autonomy. COFECE has the ability to regulate essential facilities, order the divestment of assets and eliminate barriers to competition, set higher fines for violations of the Federal Antitrust Law, implement important changes to rules governing mergers and anti-competitive behavior and limit the availability of legal defenses against the application of the law.

In Mexico, we are involved in different ongoing competition related proceedings. We believe that the outcome of these proceedings will not have a material adverse effect on our financial position or results. See “Item 8. Financial Information—Legal Proceedings—Coca-Cola FEMSA.”

We are subject to antitrust legislation in the countries where we operate, primarily in relation to mergers and acquisitions that we are involved in. The transactions in which we participate may be subject to the requirement to obtain certain authorizations from the relevant authorities. Management believes that we are currently in compliance in all material respects with antitrust legislation in the countries where we operate.

Recent Tax Reforms

On April 1, 2015, the Brazilian government issued Decree No. 8.426/15 to impose, as of July 2015, PIS/COFINS (Social Contributions on Gross Revenues) of 4.65% on financial income (except for foreign exchange variations).

Since 2016, the Brazilian rates of value-added tax in certain states changed as follows: Mato Grosso do Sul from 17% to 20%; Minas Gerais, 18% and an additional 2% to be charged on sales to non-taxpayers, as a contribution to a poverty eradication fund; Rio de Janeiro, the contribution to poverty eradication increased from 1% to 2% as of April 2016; and Parana, 16% and an additional 2% to be charged on sales to non-taxpayers, as a contribution to a poverty eradication fund. In addition and specifically for sales of beer, the value-tax added tax rate increased to a maximum of 25%.

 

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In addition, as of January 1, 2016, the Brazilian federal production tax rates were reduced and the rates of the federal sales tax were increased, being both taxes average of 16.2% over net sales.

On January 1, 2015, a general tax reform became effective in Colombia. This reform included the imposition of a new temporary tax on net equity through 2017 to Colombian residents and non-residents who own property in Colombia directly or indirectly through branches or permanent establishments. The relevant taxable base will be determined annually based on a formula. For net equity that exceeds 5.0 billion Colombian pesos (approximately US$ 2.1 million) the rate was 1.15% in 2015, 1.00% in 2016 and will be 0.40% in 2017. In addition, the tax reform in Colombia imposed that the supplementary income tax at a rate of 9% as contributions to social programs, which was previously scheduled to decrease to 8% by 2015, will remain indefinitely. Additionally, this tax reform included the imposition of a temporary contribution to social programs at a rate of 5%, 6%, 8% and 9% for the years 2015, 2016, 2017 and 2018, respectively. Finally, this reform establishes an income tax deduction of 2% of value-added tax paid in the acquisition or import of hard assets, such as tangible and amortizable assets that are not sold or transferred in the ordinary course of business and that are used for the production of goods or services.

On January 1, 2017, a new general tax reform became effective in Colombia. This reform reduced the corporate income tax rate from 35.0% to 34.0% for 2017 and then to 33.0% for the following years. In addition, for entities located outside of free trade zones, the reform imposed an extra income tax rate of 6.0% for 2017 and 4.0% for 2018. For taxpayers located in free trade zones, the special income tax rate increased from 15.0% to 20.0% starting in 2017. Additionally, the reform eliminated the temporary tax on net equity, the supplementary income tax of 9.0% for contributions to social programs and the temporary contribution to social programs at a rate of 5.0%, 6.0%, 8.0% and 9.0% for the years 2015, 2016, 2017 and 2018, respectively. For 2017, dividends paid to individuals that are Colombian residents will be subject to a withholding of 35.0%, and dividends paid to foreign individuals or non-Colombian resident entities will be subject to a withholding of 5.0%. This reform increased the rate of the presumptive income on net equity ( renta presuntiva sobre el patrimonio ), which is generated when a loss or low net income is recorded, from 3.0% to 3.5% for 2017. Finally, starting in 2017, the Colombian general value-added tax rate increased from 16.0% to 19.0%.

On December 30, 2015, the Venezuelan government enacted a package of tax reforms that became effective in 2016. This reform, among other things, (i) eliminates the inflationary adjustments for the calculation of income tax as well as the new investment tax deduction and (ii) imposes a new tax on financial transactions effective as of February 1, 2016, for those identified as “special taxpayers” at a rate of 0.75% over certain financial transactions, such as bank withdrawals, transfer of bonds and securities, payment of debts without intervention of the financial system and debits on bank accounts for cross-border payments, which will be immediately withheld by the banks. Given the inherent uncertainty as to how the Venezuelan Tax Administration will require that the aforementioned inflation adjustments be applied, starting 2016 the Company decided to recognize the effects of elimination of the inflationary adjustments.

On November 18, 2014, a tax reform became effective in Venezuela. This reform included changes on how the carrying value of operating losses is reported. The reform established that operating losses carried forward year over year (but limited to three fiscal years) may not exceed 25% of the taxable income in the relevant period. The reform also eliminated the possibility to carry over losses relating to inflationary adjustments and included changes that grant Venezuelan tax authorities broader powers and authority in connection with their ability to enact administrative rulings related to income tax withholding and to collect taxes and increase fines and penalties for tax-related violations, including the ability to confiscate assets without a court order.

In Guatemala, the income tax rate for 2014 was 28% and it decreased for 2015 to 25%, as scheduled.

On January 27, 2016, the Chilean National Congress approved a bill with the main object of simplifying the new income tax system enacted under the Tax Reform Law published in September 2014 (Law N° 20.780). In addition, in July 2016 Chilean tax authorities issued a public ruling containing extensive guidance on the new dual income tax regimes that will apply as from January 1, 2017. The new ruling revokes previous rulings issued in 2015 and reflects changes introduced in a February 2016 law designed to simplify and clarify the 2014 tax reform law, including the provisions relating to the dual income tax regimes. Some types of taxpayers are restricted to one of the two tax regimes, but taxpayers eligible for either regime must opt into their preferred regime before December 31, 2016. Starting in 2017, Chilean taxpayers subject to the first category income tax (FCIT) will be subject to one of the following two tax regimes: (i) the fully integrated regime, under which shareholders will be taxed on their share of the profits that are accrued annually by the Chilean entity; the combined income tax rate under the regime will be 35%, (ii) the partially integrated regime, under which shareholders will be taxed when profits are distributed. The combined income tax rate under the regime generally will be 44.45% (27% plus a 35%WHT); however, foreign shareholders (Non-Chilean shareholders) that are residents in a country that has concluded a tax treaty with Chile (i.e. Mexico) will be entitled to a full tax credit, and thus may benefit from a combined rate of 35%. All entities directly or indirectly held by FEMSA are deemed under the partially integrated regime.

 

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Taxation of Sparkling Beverages

All the countries where Coca-Cola FEMSA operates, except for Panama, impose a value-added tax on the sale of sparkling beverages, with a rate of 16.0% in Mexico, 12.0% in Guatemala, 15.0% in Nicaragua, an average percentage of 15.8% in Costa Rica, 19.0% in Colombia (applied only to the first sale in the supply chain), 12.0% in Venezuela, 21.0% in Argentina, and in Brazil 16.0% in the state of Parana, 17.0% in the state of Goias and Santa Catarina, 18.0% in the states of Sao Paulo, Minas Gerais and Rio de Janeiro, and 20.0% in the states of Mato Grosso do Sul and Rio Grande do Sul. The states of Rio de Janeiro, Minas Gerais and Parana also charge an additional 2.0% on sales to non-taxpayers as a contribution to a poverty eradication fund. In Brazil the value-added tax is grossed-up and added, along with federal sales tax, at the taxable basis. In addition, Coca-Cola FEMSA is responsible for charging and collecting the value-added tax from each of its retailers in Brazil, based on average retail prices for each state where it operates, defined primarily through a survey conducted by the government of each state, which in 2016 represented an average taxation of approximately 11.1% over net sales. In addition, several of the countries where Coca-Cola FEMSA operates impose the following excise or other taxes:

 

   

Mexico imposes an excise tax of Ps.1.00 per liter on the production, sale and importation of beverages with added sugar and HFCS as of January 1, 2014. This excise tax is applied only to the first sale and Coca-Cola FEMSA is responsible for charging and collecting it. The excise tax is subject to a 10.0% increase when accumulated inflation in Mexico on an annual basis since November 2013 reaches 10.0%. The increased tax is imposed starting on the fiscal year following such increase. As of November 2016, accumulated inflation in Mexico since November 2013 had not reached 10.0%.

 

   

Guatemala imposes an excise tax of 0.18 cents in local currency (Ps.0.49 as of December 31, 2016) per liter of sparkling beverage.

 

   

Costa Rica imposes a specific tax on non-alcoholic bottled beverages based on the combination of packaging and flavor, currently assessed at 18.46 colones (Ps.0.68 as of December 31, 2016) per 250 ml, and an excise tax currently assessed at 6.384 colones (approximately Ps.0.23 as of December 31, 2016) per 250 ml.

 

   

Nicaragua imposes a 9.0% tax on consumption, and municipalities impose a 1.0% tax on Coca-Cola FEMSA’s Nicaraguan gross income.

 

   

Panama imposes a 5.0% tax based on the cost of goods produced and a 10.0% selective consumption tax on syrups, powders and concentrate.

 

   

Argentina imposes an excise tax of 8.7% on sparkling beverages containing less than 5.0% lemon juice or less than 10.0% fruit juice, and an excise tax of 4.2% on sparkling water and flavored sparkling beverages with 10.0% or more fruit juice, although this excise tax is not applicable to some of Coca-Cola FEMSA’s products.

 

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Brazil assesses an average production tax of approximately 3.9% and an average sales tax of approximately 12.3% over net sales. Beginning on May 1, 2015, these federal taxes were applied based on the price sold, as detailed in Coca-Cola FEMSA’s invoices, instead of an average retail price combined with a fixed tax rate and multiplier per presentation. Except for sales to wholesalers, these production and sales taxes apply only to the first sale and Coca-Cola FEMSA is responsible for charging and collecting these taxes from each of its retailers. For sales to wholesalers, they are entitled to recover the sales tax and charge this tax again upon the resale of Coca-Cola FEMSA’s products to retailers.

 

   

Colombia’s municipalities impose a sales tax that varies between 0.35% and 1.2% of net sales.

 

   

Venezuela’s municipalities impose a variable excise tax applied only to the first sale that varies between 0.6% and 2.5% of net sales.

Price Controls

Voluntary price restraints or statutory price controls have been imposed historically in several of the countries where Coca-Cola FEMSA operates. Currently, there are no price controls on Coca-Cola FEMSA’s products in any of the territories where it has operations, except for those in Argentina, where authorities directly supervise six of Coca-Cola FEMSA’s products sold through supermarkets as a measure to control inflation, and Venezuela, where the government has imposed price controls on certain products, including bottled water. In addition, in January 2014, the Venezuelan government passed the Fair Prices Law ( Ley Orgánica de Precios Justos ), which was amended in November 2014 and once again in November 2015, mainly to increase applicable fines and penalties. The purpose of this law is to establish regulations and administrative proceedings to impose a limit on profits earned on the sale of goods, including Coca-Cola FEMSA’s products, seeking to maintain price stability of, and equal access to, goods and services. A ruling derived from this law imposes an obligation to manufacturing companies to label products with the fair or maximum sales’ price for each product. In December 2016, Coca-Cola FEMSA’s Venezuelan subsidiary requested a waiver from the Venezuelan government to stop labeling products because of the difficulty to maintain updated prices in products with low inventory turnover. Since then, Coca-Cola FEMSA stopped including a fair price label on our products. We cannot assure you that the Venezuelan government will grant the requested waiver, or that they will not impose any sanctions or fines as a result of Coca-Cola FEMSA’s labeling practices. Similarly, we cannot assure you that Coca-Cola FEMSA will be in compliance at all times with these laws based on changes and market dynamics in Argentina and Venezuela and the lack of clarity of certain basic aspects of the applicable law in Venezuela. Any such changes and potential violations may have an adverse effect on our business. See “Risk Factors—Risks Related to Our Company – Coca-Cola FEMSA— Regulatory developments may adversely affect Coca-Cola FEMSA’s business .”

Environmental Matters

In all of the countries where we operate, we are subject to federal and state laws and regulations relating to the protection of the environment. In Mexico, the principal legislation is the Federal General Law for Ecological Equilibrium and Environmental Protection ( Ley General de Equilibrio Ecológico y Protección al Ambiente , or the Mexican Environmental Law), and the General Law for the Prevention and Integral Management of Waste ( Ley General para la Prevención y Gestión Integral de los Residuos ) which are enforced by the Ministry of the Environment and Natural Resources ( Secretaría del Medio Ambiente y Recursos Naturales, or SEMARNAT). SEMARNAT can bring administrative and criminal proceedings against companies that violate environmental laws, and it also has the power to close non-complying facilities. Under the Mexican Environmental Law, rules have been promulgated concerning water, air and noise pollution and hazardous substances. In particular, Mexican environmental laws and regulations require that we file periodic reports with respect to hazardous wastes and set forth standards for waste water discharge that apply to Coca-Cola FEMSA’s operations. Coca-Cola FEMSA is also subject to certain minor restrictions on the operation of delivery trucks in Mexico City.

In March 2015, the General Law of Climate Change ( Ley General de Cambio Climático ), its regulation and certain decrees related to such law became effective, imposing upon different industries (including the food and beverage industry) the obligation to report direct or indirect gas emissions exceeding 25,000 tons of carbon dioxide. Currently, we are not required to report these emissions, since it does not exceed this threshold. We cannot assure you that Coca-Cola FEMSA will not be required to comply with this reporting requirement in the future.

 

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In Coca-Cola FEMSA’s Mexican operations, Coca-Cola FEMSA established a partnership with The Coca-Cola Company and Alpla, its supplier of plastic bottles in Mexico, to create Industria Mexicana de Reciclaje (IMER), a PET recycling facility located in Toluca, Mexico. This facility began operations in 2005 and has a recycling capacity of approximately 25,000 metric tons per year from which 15,000 metric tons can be re-used for food packaging purposes. Coca-Cola FEMSA has also continued contributing funds to ECOCE, A.C., a nationwide collector of containers and packaging materials. In addition, Coca-Cola FEMSA’s plants located in Toluca, Reyes, Cuautitlan, Apizaco, San Cristobal, Morelia, Ixtacomitan, Coatepec, Poza Rica, Pacifico, Ojuelos, Sabino, San Juan Del Rio, Querétaro, Altamira, Victoria and Cuernavaca have received or are in the process of receiving a Certificate of Clean Industry ( Certificado de Industria Limpia ). In addition, seven of Coca-Cola FEMSA’s distribution centers located in the State of Mexico, Mexico have received or are in the process of receiving a Certificate of Clean Industry.

As part of Coca-Cola FEMSA’s environmental protection and sustainability strategies, in December 2009, Coca-Cola FEMSA, jointly with strategic partners, entered into a wind energy supply agreement with a Mexican subsidiary of the Spanish wind farm developer, GAMESA Energía, S.A., or GAMESA, to supply green energy to Coca-Cola FEMSA’s bottling facility in Toluca, Mexico, owned by its subsidiary, Propimex, S. de R.L. de C.V., or Propimex, and to some of its suppliers of PET bottles. In 2010, GAMESA sold its interest in the Mexican entity that owned the wind farm to Iberdrola Renovables México, S.A. de C.V. This wind farm, which is located in La Ventosa, Oaxaca, generates approximately 100,000 megawatt hours annually. In 2014, 2015 and 2016, this wind farm provided Coca-Cola FEMSA with approximately 64,460, 64,430 and 57,750 megawatt hours, respectively.

Additionally, Coca-Cola FEMSA has also entered into 20-year wind power supply agreements with two suppliers to receive clean and renewable energy for use at our production and distribution facilities throughout Mexico: (a) Energía Eólica del Sur, S.A.P.I. de C.V. (formerly known as Mareña Renovables Wind Power Farm), or Energía Eólica del Sur, which is expected to begin operations in 2018; and (b) Enel Green Power which provided megawatt hours to Coca-Cola FEMSA’s production and distribution facilities in 2016. In 2016, five of Coca-Cola FEMSA’s manufacturing facilities received megawatt hours from renewable energy sources such as bagasse cogeneration from the PIASA “Tres Valles” sugar mill.

FEMSA Comercio has also entered into 20-year wind power supply agreements with four suppliers to receive clean and renewable energy for use at its convenience and drug stores throughout Mexico: (a) Energía Eólica del Sur; (b) Enel Green Power which is expected to begin operations in 2018 as well; (c) Enel Green Power which provided megawatt hours to 436 OXXO stores and 280 drug stores in 2016; and (d) Ventika, which provided megawatt hours to 2,685 OXXO stores in 2016. In 2016, 14.7% of FEMSA Comercio’s energy consumption in Mexico came from renewable energy sources.

Coca-Cola FEMSA’s Central American operations are subject to several federal and state laws and regulations relating to the protection of the environment, which have been enacted in the last ten years, as awareness has increased in this region about the protection of the environment and the disposal of hazardous and toxic materials, as well as water usage. Coca-Cola FEMSA’s Costa Rican operations have participated in a joint effort along with the local division of The Coca-Cola Company, Misión Planeta, for the collection and recycling of non-returnable plastic bottles.

Coca-Cola FEMSA’s Colombian operations are subject to several Colombian federal and state laws and regulations related to the protection of the environment and the disposal of treated water and toxic and hazardous materials. These laws include the control of atmospheric emissions, noise emissions, disposal of treated water and strict limitations on the use of chlorofluorocarbons. In addition, on February 6, 2012, Colombia promulgated Decree No. 303, which requires Coca-Cola FEMSA to apply for an authorization to discharge its water into public waterways. Coca-Cola FEMSA is engaged in nationwide reforestation programs and campaigns for the collection and recycling of glass and plastic bottles, among other programs with positive environmental impacts. Coca-Cola FEMSA has also obtained and maintained the ISO 9001, ISO 14001, OHSAS 18001, FSSC 22000 and PAS 220 certifications for its plants located in Medellin, Cali, Bogota, Barranquilla, Bucaramanga and La Calera, as recognition for the highest quality and food harmlessness in its production processes, which is evidence of Coca-Cola FEMSA’s strict level of compliance with relevant Colombian regulations. Coca-Cola FEMSA’s six plants joined a small group of companies that have obtained these certifications. Coca-Cola FEMSA expects its new plant located in Tocancipa, that commenced operations in February 2015, will obtain the Leadership in Energy and Environmental Design (LEED) certification in 2017.

 

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Coca-Cola FEMSA’s Venezuelan operations are subject to several Venezuelan federal, state and municipal laws and regulations related to the protection of the environment. The most relevant of these laws are the Organic Environmental Law ( Ley Orgánica del Ambiente ), the Substance, Material and Dangerous Waste Law ( Ley Sobre Sustancias, Materiales y Desechos Peligrosos ), the Criminal Environmental Law ( Ley Penal del Ambiente ) and the Water Law ( Ley de Aguas ). Since the enactment of the Organic Environmental Law in 1995, Coca-Cola FEMSA’s Venezuelan subsidiary has presented the corresponding authorities with plans to bring Coca-Cola FEMSA’s production facilities and distribution centers into compliance with applicable laws, which mainly consist of building or expanding the capacity of water treatment plants in Coca-Cola FEMSA’s bottling facilities. Coca-Cola FEMSA currently has water treatment plants in its bottling facilities located in the cities of Barcelona, Valencia and in its Antimano bottling plant in Caracas, and Coca-Cola FEMSA is still under construction and expansion of its current water treatment plant in its bottling facility in Maracaibo.

Coca-Cola FEMSA’s Brazilian operations are subject to several federal, state and municipal laws and regulations related to the protection of the environment. Among the most relevant laws and regulations are those dealing with the emission of toxic and hazardous gases and disposal of wastewater and solid waste, soil contamination by hazardous chemicals, which impose penalties, such as fines, facility closures or criminal charges depending upon the level of non-compliance.

Coca-Cola FEMSA’s production plant located in Jundiai has been recognized by the Brazilian authorities for its compliance with environmental regulations and for having standards well above those imposed by applicable law. This production plant has been certified for GAO-Q and GAO-E. In addition, the plants of Jundiai, Mogi das Cruzes, Campo Grande, Marilia, Maringa, Curitiba and Bauru have been certified for (i) ISO 9001; (ii) ISO 14001and; (iii) norm OHSAS 18001. In 2012, the Jundiai, Campo Grande, Bauru, Marilia, Curitiba, Maringa and Mogi das Cruzes plants were certified in standard FSSC22000.

In November 2015, Coca-Cola FEMSA entered into two five-year wind power supply agreements with the following suppliers to receive renewable energy for use at its production and distribution facilities in Brazil: (a) Brookfield Energía Comercializadora, Ltda., which provided a total of 13,224 megawatt hours in 2016 and (b) CPFL Comercializão Brasil, S.A., which provided a total of 32,527 megawatt hours in 2016. In 2016, 11 of Coca-Cola FEMSA’s Brazilian facilities received energy from renewable energy sources, which represented 24.0% of Coca-Cola FEMSA’s energy consumption in Brazil.

In May 2008, a municipal regulation of the City of Sao Paulo, implemented pursuant to Law 13.316/2002, came into effect requiring Coca-Cola FEMSA to collect for recycling a specified annual percentage of plastic bottles made from PET sold in the City of Sao Paulo. Beginning in May 2011, Coca-Cola FEMSA was required to collect 90.0% of PET bottles sold. Currently, Coca-Cola FEMSA’s is not able to collect the entire required volume of PET bottles it sells in the City of Sao Paulo. Since Coca-Cola FEMSA does not meet the requirements of this regulation, which it believes to be more onerous than those imposed by the countries with the highest recycling standards, Coca-Cola FEMSA could be fined and be subject to other sanctions, such as the suspension of operations in any of Coca-Cola FEMSA’s plants and/or distribution centers located in the City of Sao Paulo. In May 2008, when this law came into effect, Coca-Cola FEMSA and other bottlers in the City of Sao Paulo, through the Brazilian Soft Drink and Non-Alcoholic Beverage Association, or ABIR ( Associação Brasileira das Indústrias de Refrigerantes e de Bebidas Não-alcoólicas ), filed a motion requesting a court to overturn this regulation due to the impossibility of compliance. In November 2009, in response to a request by a municipal authority to provide evidence of the destination of the PET bottles sold in Sao Paulo, Coca-Cola FEMSA filed a motion presenting all of its recycling programs and requesting a more practical timeline to comply with the requirements imposed. In October 2010, the municipal authority of Sao Paulo levied a fine on Coca-Cola FEMSA’s Brazilian operating subsidiary of 250,000 Brazilian reais (approximately Ps. 1.5 million as of December 31, 2016) on the grounds that the report submitted by Coca-Cola FEMSA’s Brazilian operating subsidiary did not comply with the 75.0% proper disposal requirement for the period from May 2008 to May 2010. Coca-Cola FEMSA filed an appeal against this fine, which was denied by the municipal authority in May 2013. This resolution by the municipal authority is final and not subject to appeal. However, in July 2012, the State Appellate Court of Sao Paulo rendered a decision on an interlocutory appeal filed on behalf of ABIR staying the requirement to pay the fines and other sanctions imposed on ABIR’s associated companies, including Coca-Cola FEMSA’s Brazilian subsidiary, pending the final resolution of the appeal. Coca-Cola FEMSA is still awaiting the final resolution of the appeal filed on behalf of ABIR. In November 2016, the municipal authority filed a tax enforcement claim against Coca-Cola FEMSA’s Brazilian subsidiary in order to try to collect the fine imposed in October 2010. Coca-Cola FEMSA’s Brazilian subsidiary is currently analyzing its options, which include filing a motion against the collection of the fine based on the decision rendered by the State Appellate Court of Sao Paulo in July 2012. We cannot assure you that these measures will have the desired effect or that Coca-Cola FEMSA will prevail in any judicial challenge that our Brazilian subsidiary may pursue.

 

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In August 2010, Law No. 12.305/2010 established the Brazilian National Solid Waste Policy. This policy is based on the principle of shared responsibility between the government, companies and the public, and provides for the post-consumption return of products to companies and requires public authorities to implement waste management programs. This law is regulated by Federal Decree No. 7.404/2010, and was published in December 2010. In response to the Brazilian National Solid Waste Policy, in December 2012, a proposal of agreement was provided to the Ministry of the Environment by almost 30 associations involved in the packaging sector, including ABIR in its capacity as representative for The Coca-Cola Company, Coca-Cola FEMSA’s Brazilian subsidiary and other bottlers. This agreement proposed the creation of a “coalition” to implement systems for reverse logistics packaging non-dangerous waste that make up the dry fraction of municipal solid waste or equivalent. The goal of the proposal is to create methodologies for sustainable development, and improve the management of solid waste by increasing recycling rates and decreasing incorrect disposal in order to protect the environment, society and the economy. The Ministry of Environment approved and signed this agreement in November 2015. In August 2016, the public prosecutor’s office of the state of Sao Paulo filed a class action against the parties that signed this agreement, challenging the validity of certain terms of the agreement and the effectiveness of the mandatory measures to be taken by the companies of the packaging sector, as provided in the agreement. ABIR is leading the lawsuit’s defense.

Coca-Cola FEMSA’s Argentine operations are subject to federal and municipal laws and regulations relating to the protection of the environment. The most significant of these are regulations concerning waste water discharge, which are enforced by the Ministry of Natural Resources and Sustainable Development ( Secretaría de Ambiente y Desarrollo Sustentable ) and the Provincial Organization for Sustainable Development ( Organismo Provincial para el Desarrollo Sostenible ) for the province of Buenos Aires. Coca-Cola FEMSA’s Alcorta plant is in compliance with environmental standards and Coca-Cola FEMSA has been, and continues to be, certified for ISO 14001:2004 for the plants and operative units in Buenos Aires.

For all of Coca-Cola FEMSA’s plant operations, Coca-Cola FEMSA employs the following environmental management system Environmental Administration System, or EKOSYSTEM ( Sistema de Administración Ambiental ) that is contained within the Integral Quality System or SICKOF ( Sistema Integral de Calidad ).

Coca-Cola FEMSA has spent, and may be required to spend in the future, funds for compliance with and remediation under local environmental laws and regulations. Currently, Coca-Cola FEMSA does not believe that such costs will have a material adverse effect on its results or financial condition. However, since environmental laws and regulations and their enforcement are becoming increasingly stringent in Coca-Cola FEMSA’s territories, and there is increased recognition by local authorities of the need for higher environmental standards in the countries where Coca-Cola FEMSA operates, changes in current regulations may result in an increase in costs, which may have an adverse effect on Coca-Cola FEMSA’s future results or financial condition. We are not aware of any significant pending regulatory changes that would require a significant amount of additional remedial capital expenditures.

We do not believe that our business activities pose a material risk to the environment, and we believe that we are in material compliance with all applicable environmental laws and regulations.

Water Supply

In Mexico, Coca-Cola FEMSA obtains water directly from municipal utility companies and pump water from wells pursuant to concessions obtained from the Mexican government on a plant-by-plant basis. Water use in Mexico is regulated primarily by the 1992 Water Law ( Ley de Aguas Nacionales de 1992 ), as amended, and regulations issued thereunder, which created the National Water Commission ( Comisión Nacional del Agua ). The National Water Commission is in charge of overseeing the national system of water use. Under the 1992 Water Law, concessions for the use of a specific volume of ground or surface water generally run from five to fifty-year terms, depending on the supply of groundwater in each region as projected by the National Water Commission. Concessionaires may request concession terms be extended before the expiration of the same. The Mexican government is authorized to reduce the volume of ground or surface water granted for use by a concession by whatever volume of water that is not used by the concessionaire for two consecutive years. However, because the current concessions for each of Coca-Cola FEMSA’s plants in Mexico do not match each plant’s projected needs for water in future years, we have successfully negotiated with the Mexican government the right to transfer the unused volume under concessions from certain plants to other plants anticipating greater water usage in the future. Coca-Cola FEMSA’s concessions may be terminated if, among other things, Coca-Cola FEMSA uses more water than permitted or it fails to pay required concession-related fees and does not cure such situations in a timely manner. Although we have not undertaken independent studies to confirm the sufficiency of the existing groundwater supply, we believe that Coca-Cola FEMSA’s existing concessions satisfy Coca-Cola FEMSA’s current water requirements in Mexico.

 

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In addition, the 1992 Water Law provides that plants located in Mexico that use deep water wells to supply their water requirements must pay a fee to the local governments for the discharge of residual waste water to drainage. Pursuant to this law, certain local authorities test the quality of the waste water discharge and charge plants an additional fee for measurements that exceed certain standards published by the National Water Commission. In the case of non-compliance with the law, penalties, including closures, may be imposed. All of Coca-Cola FEMSA’s bottling plants located in Mexico meet these standards. In addition, Coca-Cola FEMSA’s plants in Apizaco and San Cristobal are certified with ISO 14001.

In Brazil, Coca-Cola FEMSA obtains water and mineral water from wells pursuant to concessions granted by the Brazilian government for each plant. According to the Brazilian Constitution and the National Water Resources Policy, water is considered an asset of common use and can only be exploited for the national interest by Brazilians or companies formed under Brazilian law. Concessionaires and users have the responsibility for any damage to the environment. The exploitation and use of water is regulated by the Code of Mining, Decree Law No. 227/67 ( Código de Mineração ), the Mineral Water Code, Decree Law No. 7841/45 ( Código de Águas Minerais ), the National Water Resources Policy (Decree No. 24.643/1934 and Law No. 9433/97) and by regulations issued thereunder. The companies that exploit water are supervised by the National Department of Mineral Production ( Departamento Nacional de Produção Mineiral —DNPM) and the National Water Agency ( Agência Nacional de Águas ) in connection with federal health agencies, as well as state and municipal authorities. In the Jundiai, Marilia, Curitiba, Maringa and Itabirito plants, Coca-Cola FEMSA does not exploit spring water. In the Mogi das Cruzes, Bauru and Campo Grande plants, Coca-Cola FEMSA has all the necessary permits for the exploitation of spring water.

In Colombia, in addition to natural spring water for Manantial , Coca-Cola FEMSA obtains water directly from wells and from utility companies. Coca-Cola FEMSA is required to have a specific concession to exploit water from natural sources. Water use in Colombia is regulated by Law No. 9 of 1979 and Decrees No. 2811 of 1974 and No. 3930 of 2010. In addition, Decree No. 303 requires Coca-Cola FEMSA to apply for water concessions and for authorization to discharge its water into public waterways. The Ministry of Environment and Sustainable Development and Regional Autonomous Corporations supervises companies that use water as a raw material for their businesses. Furthermore, in Colombia, Law No. 142 of 1994 provides that public sewer services are charged based on volume (usage). The Water and Sewerage Company of the City of Bogota has interpreted this rule to be the volume of water captured, and not the volume of water discharged by users. Based on Coca-Cola FEMSA’s production process, Coca-Cola FEMSA’s Colombian subsidiary discharges into the public sewer system significantly less water than the water it captures. As a result, since October 2010 Coca-Cola FEMSA’s Colombian subsidiary has filed monthly claims with the Water and Sewerage Company of the City of Bogota challenging these charges. In 2015, the highest court in Colombia issued a final ruling stating that the Water and Sewerage Company of the City of Bogota is not required to measure the volume of water discharged by users in calculating public sewer services charges. Based on this ruling, the Water and Sewerage Company of the City of Bogota commenced an administrative proceeding against our Colombian subsidiary requesting payment of approximately Ps.309 million for the sewer services it claims Coca-Cola FEMSA’s subsidiary has not properly paid since 2005. In connection with such proceeding, in March 2016, this authority issued an order freezing certain of our bank accounts (see Note 8.2 to our consolidated financial statements). Coca-Cola FEMSA’s Colombian subsidiary is currently holding conciliatory hearings seeking to reach an agreement to settle this matter.

 

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In Argentina, a state water company provides water to Coca-Cola FEMSA’s Alcorta plant on a limited basis; however, Coca-Cola FEMSA believes the authorized amount meets its requirements for this plant. In Coca-Cola FEMSA’s Monte Grande plant in Argentina, it pumps water from wells, in accordance with Law No. 25.688.

In Nicaragua, the use of water is regulated by the National Water Law ( Ley General de Aguas Nacionales ), and Coca-Cola FEMSA obtain water directly from wells. In Costa Rica, the use of water is regulated by the Water Law ( Ley de Aguas ). In both of these countries, Coca-Cola FEMSA exploits water from wells granted to it through governmental concessions. In Guatemala, no license or permits are required to exploit water from the private wells in Coca-Cola FEMSA’s own plants. In Panama, Coca-Cola FEMSA acquires water from a state water company, and the use of water is regulated by the Panama Use of Water Regulation ( Reglamento de Uso de Aguas de Panamá ).

In Venezuela, Coca-Cola FEMSA uses private wells in addition to water provided by the municipalities, and it has taken the appropriate actions, including actions to comply with water regulations, to have water supply available from these sources, regulated by the Water Law ( Ley de Aguas ).

In addition, Coca-Cola FEMSA obtains water for the production of some of its natural spring water products, such as Manantial in Colombia and Crystal in Brazil, from spring water pursuant to concessions granted.

We cannot assure that water will be available in sufficient quantities to meet Coca-Cola FEMSA’s future production needs, that Coca-Cola FEMSA will be able to maintain its current concessions or that additional regulations relating to water use will not be adopted in the future in Coca-Cola FEMSA’s territories. We believe Coca-Cola FEMSA is in material compliance with the terms of its existing water concessions and that Coca-Cola FEMSA is in compliance with all relevant water regulations currently in place.

Other Regulations

In January 2012, the Costa Rican government approved a decree which regulates the sale of food and beverages in public schools. According to the decree, the sale of all sparkling beverages and certain still beverages that contain certain amounts of sugar, syrup or HFCS in any type of presentation in schools is prohibited. Coca-Cola FEMSA is still allowed to sell water and certain still beverages in schools. Although Coca-Cola FEMSA is in compliance with this law, we cannot assure you that the Costa Rican government will not further restrict sales of other of Coca-Cola FEMSA’s products in schools in the future; these restrictions and any further restrictions could have an adverse impact on Coca-Cola FEMSA’s results of operations.

In May 2012, the Venezuelan government adopted significant changes to labor regulations that had a negative impact on Coca-Cola FEMSA’s business and operations. The principal changes that impacted Coca-Cola FEMSA’s operations were and still are: (i) the requirement that employee terminations are now subject to governmental authorization; (ii) retroactive assessments for any modifications to our severance payment system; (iii) a reduction in the maximum daily and weekly working hours (from 44 to 40 weekly); (iv) an increase in mandatory weekly breaks, prohibiting a reduction in salaries as a result of such increase; and (v) the requirement that all third party contractors participating in the manufacturing and sales processes of our products be included in our payroll. Coca-Cola FEMSA is currently in compliance with these labor regulations.

In September 2012, the Brazilian government issued Law No. 12,619 (Law of Professional Drivers), which regulates the working hours of professional drivers who distribute Coca-Cola FEMSA’s products from its plants to the distribution centers and to retailers and points of sale. Pursuant to this law, employers must keep a record of working hours, including overtime hours, of professional drivers in a reliable manner, such as electronic logbooks or worksheets. Coca-Cola FEMSA is currently in compliance with this law.

 

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In August 2013, the current Mexican president, Enrique Peña Nieto, proposed a constitutional reform to provide for modernization and growth of the Mexican energy sector (the “Mexican Energy Reform”). Following intense review of and debate on the proposal, in December 2013 the Mexican government approved a decree containing amendments and additions to the Mexican Constitution in matters of energy. The Mexican Energy Reform provides for the opening of the Mexican energy market to the participation of private parties including companies with foreign investment, allowing for FEMSA Comercio to participate directly in the retail of fuel products. However, secondary legislation and regulation of the approved Mexican Energy Reform is in transition, and deregulation of fuel prices will be conducted gradually; starting in March 2017 in the states of Baja California and Sonora and concluding in December 2017 in the states of the Yucatan peninsula. Gasoline and diesel prices are established by the Mexican executive power by decree, taking into account the price of petroleum, currency exchange rates, taxes, transportation cost differences between regions and other factors, and starting January 1, 2018, retail prices for gasoline and diesel will be freely determined by market conditions. As part of the secondary legislation in connection with the Mexican Energy Reform, the Agencia de Seguridad, Energia y Ambiente (the Security, Energy and Environment Agency, or ASEA) was created as a decentralized administrative body of SEMARNAT. ASEA is responsible for regulating and supervising industrial and operational safety and environmental protection in the installations and activities of the hydrocarbons sector, which includes all our Fuel Division operations. Additionally, the Comisión Reguladora de Energía (the Energy Regulatory Commission, or CRE) is the regulatory body responsible for the authorization of sale of fuel to the public at gas stations. The Fuel Division is in compliance with ASEA and CRE regulations and administrative provisions.

In May 2014, the Mexican government approved a decree that established mandatory guidelines applicable to the entire national education system (from elementary school through college). According to the decree, the sale of specific sparkling beverages and still beverages that contain certain amounts of sugar or HFCS by schools is prohibited. Schools are still allowed to sell water and certain still beverages, such as juices and juice-based beverages that comply with the guidelines established in such decree. We cannot assure you that the Mexican government will not further restrict sales of other of Coca-Cola FEMSA’s products in schools. These restrictions and any further restrictions could have an adverse impact on Coca-Cola FEMSA’s results of operations.

In November 2014, the Venezuelan government amended the Foreign Investment Law. As part of the amendments made, the law now provides that at least 75.0% of the value of foreign investment must be comprised of assets located in Venezuela, which may include equipment, supplies or other goods or tangible assets required at the early stages of operations. By the end of the first fiscal year after commencement of operations in Venezuela, investors will be authorized to repatriate up to 80.0% of the profits derived from their investment. Any profits not otherwise repatriated in a fiscal year, may be accumulated and be repatriated the following fiscal year, together with profits generated during such year. In the event of liquidation, a company may repatriate up to 85.0% of the value of the foreign investment. Currently, the scope of this law is not entirely clear with respect to the liquidation process.

In June 2014, the Brazilian government enacted Law No. 12,997 (Law of Motorcycle Drivers), which requires employers to pay a risk premium of 30.0% of the base salary to all employees that are required to drive a motorcycle to perform their job duties. This premium became enforceable in October 2014, when the related rules and regulations were issued by the Ministry of Labor and Employment. Coca-Cola FEMSA believes that these rules and regulations (Decree No. 1.565/2014) were unduly issued because such Ministry did not comply with all the requirements of applicable law (Decree No. 1.127/2003). In November 2014, Coca-Cola FEMSA’s Brazilian subsidiary, in conjunction with other bottlers of the Coca-Cola system in Brazil and through the ABIR, filed a claim before the Federal Court to stay the effects of such decree. ABIR’s associated companies, including Coca-Cola FEMSA’s Brazilian subsidiary, were issued a preliminary injunction staying the effects of the decree and exempting Coca-Cola FEMSA from paying the premium. The Ministry of Labor and Employment filed an interlocutory appeal against the preliminary injunction in order to restore the effects of Decree No. 1.565/2014. This interlocutory appeal was denied. In October 2016, a decision was rendered by the Federal Court declaring Decree No. 1.565/2014 to be null and void and requesting the Ministry of Labor and Employment to revise and reissue its regulations under Law No. 12,997. The Ministry of Labor and Employment, with the participation of all interested parties, is in the process of revising Decree No. 1.565/2014. We cannot assure you that any changes made to Decree No. 1.565/2014 will not have an adverse effect on Coca-Cola FEMSA’s business.

In January 2014, a new Anti-Corruption Law in Brazil came into effect, which regulates bribery, corruption practices and fraud in connection with agreements entered into with governmental agencies. The main purpose of this law is to impose liability on companies carrying out such practices, establishing fines that can reach up to 20.0% of a company’s gross revenues in the previous fiscal year. Although we believe Coca-Cola FEMSA is in compliance with this law, if Coca-Cola FEMSA were found liable for any of these practices, this law may have an adverse effect on Coca-Cola FEMSA’s business.

 

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In December 2015, the Venezuelan Ministry of Health issued a resolution which imposes an obligation to label certain products, including sparkling beverages and still beverages that contain sugar, with health warnings. In February 2015, the Venezuelan Ministry of Health granted a nine-month extension for the enforcement of this resolution. In July 2016, the Ministry of Health declared this resolution null and void. The Venezuelan government is currently discussing the issuance and application of new rules in connection with health warning labels on products.

In all of the countries where the Health Division operates, we are subject to local laws, regulations and administrative practices concerning retail and wholesale pharmacy operations, regulations prohibiting kickbacks, beneficiary inducement and the submission of false claims, licensure and registration requirements concerning the operation of pharmacies and the practice of pharmacy health regulation, as well as other health care laws and regulations. We believe that the Health Division is in material compliance with all such applicable laws, regulations and administrative practices.

 

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ITEM 4A. UNRESOLVED STAFF COMMENTS

None.

 

ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS

The following discussion should be read in conjunction with, and is entirely qualified by reference to, our audited consolidated financial statements and the notes to those financial statements. Our consolidated financial statements were prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”).

Overview of Events, Trends and Uncertainties

Management currently considers the following events, trends and uncertainties to be important to understanding its results and financial position during the periods discussed in this section:

 

   

Coca-Cola FEMSA has continued to grow organic volumes at a steady but moderate pace, highlighting Mexico where operative results were strong. However, in the short term there is some pressure from macroeconomic uncertainty in certain South American markets, including currency volatility. Volume growth is mainly driven by the Coca-Cola brand across markets, together with the solid performance of Coca-Cola FEMSA’s still beverage portfolio

 

   

The Retail Division has maintained high rates of store openings across formats and continues to grow at solid rates in terms of total revenues. The Retail Division has lower operating margins than our beverage business. Given that the Retail Division has lower operating margins and given its fixed cost structure, it is more sensitive to changes in sales which could negatively affect operating margins.

 

   

The Health Division has continued its moderate rate of revenue growth, highlighting the strong growth trends delivered by Socofar’s operations in Chile and Colombia, partially benefited from a positive foreign exchange translation effect. However, in Mexico, the continued expansion across new territories and the integration process of its four legacy brands into a single business platform are pressuring the Health Division’s results in the short term. Additionally, currency volatility between the Chilean and Colombian peso, compared with the Mexican peso, could further affect the Health Division’s results.

 

   

The Fuel Division has continued its steady expansion across certain regions in Mexico. The implementation of the Mexican Energy Reform enacted by the current administration, which could result in certain business opportunities for the Fuel Division, is moving forward but it is still subject to further regulatory changes that could bring more uncertainties to the industry in the short and medium term. Macroeconomic uncertainties that affect gasoline prices can also put pressure on the Fuel Division’s operating margins, which are structurally lower than those of FEMSA Comercio’s other divisions.

 

   

Our consolidated results are also significantly affected by the performance of the Heineken Group, as a result of our 20% economic interest. Our consolidated net income for 2016 included Ps. 6,342 million related to our non-controlling interest in the Heineken Group, as compared to Ps. 5,879 million for 2015.

Our results and financial position are affected by the economic and market conditions in the countries where our subsidiaries conduct their operations, particularly in Mexico. Changes in these conditions are influenced by a number of factors, including those discussed in “Item 3. Key Information—Risk Factors.”

Recent Developments

Since January 25, 2017, Coca-Cola FEMSA has had control of KOF Philippines as all decisions relating to the day-to-day operation and management of KOF Philippines’s business, including its annual normal operations plan, are now approved by a majority of KOF Philippines’s board of directors, without requiring the affirmative vote of any director appointed by The Coca-Cola Company. Beginning on February 1, 2017, Coca-Cola FEMSA started consolidating KOF Philippines’s financial results in its financial statements. The results for the first quarter of 2017 and future results in 2017 will reflect a reduction in Coca-Cola FEMSA’s share of the profit of associates and joint ventures, accounted for using the equity method, as a result of this consolidation. For further information, see Note 28 to our audited consolidated financial statements.

 

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In January 2017, FEMSA Comercio, through its subsidiary Cadena Comercial USA Corporation, LLC., completed the acquisition of the remaining 20% economic stake in Specialty’s and became its sole owner.

In February 2017, Heineken announced that it had reached an agreement to acquire Brasil Kirin Holding S.A (“Brasil Kirin”) for consideration of €664 million. The transaction is expected to close in the first half of 2017. We will recognize the results of operation of this business combination using the equity method, once Brasil Kirin has been consolidated in the financial statements of Heineken.

In March 2017, Coca-Cola FEMSA acquired, through Jugos del Valle and its Brazilian, Argentine and Colombian subsidiaries, a participation in the Mexican, Brazilian, Argentine and Colombian AdeS soy-based beverage business. As a result of this acquisition, Coca-Cola FEMSA has exclusive distribution rights of AdeS soy-based beverages in these territories.

Effects of Changes in Economic Conditions

Our results are affected by changes in economic conditions in Mexico, Brazil and in the other countries where we operate. For the years ended December 31, 2016, 2015, and 2014, 64%, 70% and 68% respectively, of our total sales were attributable to Mexico. Other than Venezuela and Chile, the participation of these other countries as a percentage of our total sales has not changed significantly during the last five years.

The Mexican economy is gradually recovering from the impact of the global financial crisis on many emerging economies in 2009. According to the INEGI, Mexican GDP expanded by 2.3% in 2016 and by approximately 2.6% and 2.3% in 2015 and 2014, respectively. According to the Banco Nacional de México survey regarding the economic expectations of specialists, Mexican GDP is expected to increase by 1.49% in 2017, as of the latest estimate, published on April 3, 2017. The Mexican economy continues to be heavily influenced by the U.S. economy, and therefore, deterioration in economic conditions in, or delays in the recovery of, the U.S. economy may hinder any recovery in Mexico.

Our results are affected by the economic conditions in the countries where we conduct operations. Some of these economies continue to be heavily influenced by the U.S. economy, and therefore, deterioration in economic conditions in the U.S. economy may affect these economies. Deterioration or prolonged periods of weak economic conditions in the countries where we conduct operations may have, and in the past have had, a negative effect on our company and a material adverse effect on our results and financial condition. Our business may also be significantly affected by the interest rates, inflation rates and exchange rates of the currencies of the countries where we operate. Decreases in growth rates, periods of negative growth and/or increases in inflation or interest rates may result in lower demand for our products, lower real pricing of our products or a shift to lower margin products. In addition, an increase in interest rates would increase the cost to us of variable rate funding, which would have an adverse effect on our financial position.

Beginning in the fourth quarter of 2014 and through 2016, the exchange rate between the Mexican peso and the U.S. dollar fluctuated from a low of Ps. 13.39 per US$ 1.00, to a high of Ps. 20.84 per US$ 1.00. At December 30, 2016, the exchange rate (noon buying rate) was Ps. 20.6170 per US$ 1.00. On April 12, 2017, this exchange rate was Ps. 18.7665 per US$ 1.00. See “Item 3. Key Information—Exchange Rate Information.” A depreciation of the Mexican peso or local currencies in the countries where we operate relative to the U.S. dollar increases our cost of raw materials priced in U.S. dollars, including raw materials whose prices are set with reference to the U.S. dollar. In addition, a depreciation of the Mexican peso or local currencies in the countries where we operate relative to the U.S. dollar will increase our U.S. dollar-denominated debt obligations, which could negatively affect our financial position and results. However, this effect could be offset by a corresponding appreciation of our U.S. dollar-denominated cash position.

 

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Operating Leverage

Companies with structural characteristics that result in margin expansion in excess of sales growth are referred to as having high “operating leverage.”

The operating subsidiaries of Coca-Cola FEMSA are engaged, to varying degrees, in capital-intensive activities. The high utilization of the installed capacity of the production facilities results in better fixed cost absorption, as increased output results in higher revenues without additional fixed costs. Absent significant increases in variable costs, gross profit margins will expand when production facilities are operated at higher utilization rates. Alternatively, higher fixed costs will result in lower gross profit margins in periods of lower output.

In addition, the commercial operations of Coca-Cola FEMSA are carried out through extensive distribution networks, the principal fixed assets of which are warehouses and trucks and are designed to handle large volumes of beverages. Fixed costs represent an important proportion of the total distribution expense of Coca-Cola FEMSA. Generally, the higher the volume that passes through the distribution system, the lower the fixed distribution cost as a percentage of the corresponding revenues. As a result, operating margins improve when the distribution capacity is operated at higher utilization rates. Alternatively, periods of decreased utilization because of lower volumes will negatively affect our operating margins.

FEMSA Comercio’s operations are characterized by low margin and relatively high fixed costs. These two characteristics make FEMSA Comercio a business with an operating margin that might be affected more easily by a change in sales levels.

Critical Accounting Judgments and Estimates

In the application of our accounting policies, which are described in Note 2.3 to our audited consolidated financial statements, management is required to make judgments, estimates and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimate is revised if the revision affects only that period or in the period of the revision and future periods if the revision affects both current and future periods.

The following are the key assumptions concerning the future and other key sources of estimation uncertainty at the end of the reporting period that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year. Existing circumstances and assumptions about future developments, however, may change due to market changes or circumstances arising beyond our control. Such changes are reflected in the assumptions when they occur.

Impairment of indefinite lived intangible assets, goodwill and depreciable long-lived assets

Intangible assets with indefinite lives including goodwill are subject to annual impairment tests. Impairment exists when the carrying value of an asset or cash generating unit (CGU) exceeds its recoverable amount, which is the higher of its fair value less costs to sell and its value in use. The fair value less costs to sell calculation is based on available data from binding sales transactions in arm’s length transactions of similar assets or observable market prices less incremental costs for disposing of the asset. In order to determine whether such assets are impaired, we initially calculate an estimation of the value in use of the cash-generating units to which such assets have been allocated. Impairment losses are recognized in current earnings in the period the related impairment is determined.

 

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We assess at each reporting date whether there is an indication that a long-lived asset may be impaired. If any indication exists, or when annual impairment testing for an asset is required, we estimate the asset’s recoverable amount. When the carrying amount of an asset or CGU exceeds its recoverable amount, the asset is considered impaired and is written down to its recoverable amount. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. In determining fair value less costs to sell, recent market transactions are taken into account, if available. If no such transactions can be identified, an appropriate valuation model is used. These calculations are corroborated by valuation multiples, quoted share prices for publicly traded subsidiaries or other available fair value indicators.

The key assumptions used to determine the recoverable amount for our CGUs, including a sensitivity analysis, are further explained in Notes 3.16 and 12 to our audited consolidated financial statements.

Useful lives of property, plant and equipment and intangible assets with defined useful lives

Property, plant and equipment, including returnable bottles as they are expected to provide benefits over a period of more than one year, as well as intangible assets with defined useful lives, are depreciated/amortized over their estimated useful lives. We base our estimates on the experience of our technical personnel as well as based on our experience in the industry for similar assets, see Notes 3.12, 3.14, 11 and 12 to our audited consolidated financial statements.

Employee benefits

We regularly evaluate the reasonableness of the assumptions used in our post-employment and other long-term employee benefit computations. Information about such assumptions is described in Note 16 to our audited consolidated financial statements.

Income taxes

Deferred income tax assets and liabilities are determined based on the differences between the financial statement carrying amounts and the tax basis of assets and liabilities. We regularly review our deferred tax assets for recoverability, and record a deferred tax asset based on our judgment regarding the probability of historical taxable income continuing in the future, projected future taxable income and the expected timing of the reversals of existing temporary differences, see Note 24 to our audited consolidated financial statements.

Tax, labor and legal contingencies and provisions

We are subject to various claims and contingencies, related to tax, labor and legal proceedings as described in Note 25 to our audited consolidated financial statements. Due to their nature, such legal proceedings involve inherent uncertainties including, but not limited to, court rulings, negotiations between affected parties and governmental actions. We periodically assess the probability of loss for such contingencies and accrues a provision and/or discloses the relevant circumstances, as appropriate. If the potential loss of any claim or legal proceeding is considered probable and the amount can be reasonably estimated, we accrue a provision for the estimated loss. Our judgment must be exercised to determine the likelihood of such a loss and an estimate of the amount, due to the subjective nature of the loss.

Valuation of financial instruments

We are required to measure all derivative financial instruments at fair value. The fair values of derivative financial instruments are determined considering quoted prices in recognized markets. If such instruments are not traded, fair value is determined by applying techniques based upon technical models supported by sufficient reliable and verifiable data, recognized in the financial sector. We base our forward price curves upon market price quotations. We believe that the chosen valuation techniques and assumptions used are appropriate in determining the fair value of financial instruments, see Note 20 to our audited consolidated financial statements.

 

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Business combinations

Acquisitions of businesses are accounted for using the acquisition method. The consideration transferred in a business combination is measured at fair value, which is calculated as the sum of the acquisition-date fair values of the assets transferred by us, liabilities assumed by us to the former owners of the acquiree and the equity interests issued by us in exchange for control of the acquiree.

At the acquisition date, the identifiable assets acquired and the liabilities assumed are recognized at their fair value, except that:

 

   

Deferred tax assets or liabilities, and assets or liabilities related to employee benefit arrangements are recognized and measured in accordance with IAS 12, “ Income Taxes ” and IAS 19, “ Employee Benefits, ” respectively;

 

   

Liabilities or equity instruments related to share-based payment arrangements of the acquiree or to our share-based payment arrangements entered into to replace share-based payment arrangements of the acquiree are measured in accordance with IFRS 2, “ Share-based Payment” at the acquisition date, see Note 3.24 to our audited consolidated financial statements; and

 

   

Assets (or disposal groups) that are classified as held for sale in accordance with IFRS 5, “ Non-current Assets Held for Sale and Discontinued Operations” are measured in accordance with that standard.

 

   

Indemnifiable assets are recognized at the acquisition date on the same basis as indemnifiable liabilities, subject to any contractual limitations.

For each acquisition, our judgment must be exercised to determine the fair value of the assets acquired, the liabilities assumed and any non-controlling interest in the acquire. In particular, we must apply estimates or make judgments as to what techniques to use, especially in forecasting CGU’s cash flows, computing WACC and estimating inflation as part of the identification of intangible assets with indefinite lives (mainly, goodwill, distribution and trademark rights).

Judgments

In the process of applying our accounting policies, we have made the following judgments which have the most significant effects on the amounts recognized in the consolidated financial statements.

Investments in associates

If we hold, directly or indirectly, 20 percent or more of the voting power of the investee, it is presumed that we have significant influence, unless it can be clearly demonstrated that this is not the case. If we hold, directly or indirectly, less than 20 percent of the voting power of the investee, it is presumed that we do not have significant influence, unless such influence can be clearly demonstrated. Decisions regarding the propriety of utilizing the equity method of accounting for a less than 20 percent-owned corporate investee require a careful evaluation of voting rights and their impact on our ability to exercise significant influence. We consider the existence of the following circumstances which may indicate that we are in position to exercise significant influence over a less than 20 percent-owned corporate investee:

 

   

Representation on the board of directors or equivalent governing body of the investee;

 

   

Participation in policy-making processes, including participation in decisions about dividends or other distributions;

 

   

Material transactions between us and the investee;

 

   

Interchange of managerial personnel; or

 

   

Provision of essential technical information.

 

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We also consider the existence and effect of potential voting rights that are currently exercisable or currently convertible when assessing whether we have significant influence.

In addition, we evaluate certain indicators that provide evidence of significant influence, such as:

 

   

Whether the extent of our ownership is significant relative to other shareholders (i.e. a lack of concentration of other shareholders);

 

   

Whether our significant shareholders, fellow subsidiaries or officers hold additional investment in the investee; and

 

   

Whether we are part of significant investee committees, such as the executive committee or the finance committee.

Joint arrangements

An arrangement can be a joint arrangement even though not all of its parties have joint control of the arrangement. When we are a party to an arrangement we shall assess whether the contractual arrangement gives all the parties or a group of the parties, control of the arrangement collectively; joint control exists only when decisions about the relevant activities require the unanimous consent of the parties that control the arrangement collectively. We need to apply judgment when assessing whether all the parties, or a group of the parties, have joint control of an arrangement. When assessing joint control, we consider the following facts and circumstances such as:

 

   

Whether all the parties, or a group of the parties, control the arrangement, considering the definition of joint control, as described in note 3.11.2 to our audited consolidated financial statements; and

 

   

Whether decisions about the relevant activities require the unanimous consent of all the parties, or of a group of the parties.

 

   

As mentioned in Note 10 to our audited consolidated financial statements, Coca-Cola FEMSA accounts for its 51% investment at KOF Philippines as a joint venture. This is based on the facts that (i) Coca-Cola FEMSA and TCCC make all operating decisions jointly during the initial four-year period, and (ii) potential voting rights to acquire the remaining 49% of KOF Philippines are not likely to be executed in the foreseeable future due to the fact the call option was “out of the money” as of December 31, 2016 and 2015.

 

   

Starting in February 2017 Coca-Cola FEMSA will take control over the relevant activities of KOF Philippines in accordance with the shareholders agreements and will consolidate KOF Philippines’ results. See Note 28.

Venezuela exchange rates and consolidation

As is further explained in Note 3.3 to our audited consolidated financial statements, the exchange rate used to account for foreign currency denominated monetary items arising in Venezuela, and also the exchange rate used to translate the financial statements of our Venezuelan subsidiary for group reporting purposes are both key sources of estimation uncertainty in preparing the accompanying consolidated financial statements.

As is also explained in Note 3.3 to our audited consolidated financial statements, we believe that we currently control our subsidiary operations in Venezuela but we recognize the challenging economic and political environment in Venezuela. Should we in the future conclude that we no longer control such operations, our consolidated financial statements would change by material amounts.

 

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Fut ure Impact of Recently Issued Accounting Standards not yet in Effect

We have not applied the following standards and interpretations that are issued but were not yet effective as of the date of issuance of our consolidated financial statements. We intend to adopt these standards, if applicable, when they become effective:

IFRS 15, Revenue from Contracts with Customers

IFRS 15, “Revenue from Contracts with Customers,” was originally issued in May 2014 and supersedes IAS 18 “Revenue” and applies to annual reporting periods beginning on or after January 1, 2018, with early adoption permitted. Revenue is recognized as control is passed, either over time or at a point in time. We do not plan to early adopt this standard, but we have determined that the adoption of this standard will be accounted for prospectively, as allowed by the corresponding transitional provisions, which provide for cumulative effect to be shown as an adjustment to retained earnings at the date of initial application.

The standard outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. In applying the revenue model to contracts within its scope, an entity will: 1) identify the contract(s) with a customer; 2) identify the performance obligations in the contract; 3) determine the transaction price; 4) allocate the transaction price to the performance obligations in the contract; and 5) recognize revenue when (or as) the entity satisfies a performance obligation. Also, an entity needs to disclose sufficient information to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers.

We are currently in the process of evaluating the potential impacts that the adoption of IFRS 15 may have on our consolidated financial statements. As part of such process, we are assessing the different revenue streams by reportable segment by applying them to the five-step revenue model in order to determine whether the performance obligations are satisfied over time or at a point in time and to identify potential gaps with our existing accounting policies, which are in accordance with IAS 18.

With regards to the Coca-Cola FEMSA reportable segment, revenue streams are mainly related to the sale of finished products and delivery of promotional products, which are currently recognized in the income statement when we transfer such goods to our customers. This revenue stream is supported by contracts maintained with different companies in the retail industry through both traditional and modern channels, in which prices with these customers are constantly negotiated due to the high turnover of our products and to remain competitive in the market. We are evaluating the potential impacts that the adoption of IFRS 15 may have on our consolidated financial statements. As part of this process, we are assessing whether such negotiations should be considered as modifications to the contracts and whether each transaction represents a separate performance obligation with the customer to be accounted for once the particular goods are delivered. Additionally, we are analyzing if any discounts offered to clients are already considered in each negotiation and recognized net of the related revenue and whether embedded derivatives may exist as well as significant financial components or agent or principal considerations as relate to our operation. Upon adoption of the new standard, other potential impacts could be identified as our new revenue accounting policy is developed and applied.

With regards to FEMSA Comercio, revenue streams are mainly related to direct sales to end consumers, in which discounts are also offered directly in the price per product available. This revenue stream is currently recognized in the income statement when we transfer such goods to our customers at the point of sale. Additionally, we provide certain services in which we act as an agent and recognize the corresponding net revenue in the income statement at the moment at which the transaction has been completed physically in the stores as meeting our performance obligation (i.e. sale of prepaid telephone minutes or other prepaid cards and services). We are analyzing whether embedded derivatives may exist as well as significant financial components or other agent or principal considerations as relate to this segment. Upon adoption of the new standard, other potential impacts could be identified as our new revenue accounting policy is developed and applied.

With regards to our other reportable segments, revenues are mainly related to contracts made directly with the end consumer, in which there are no discounts offered directly in the price of the contract. This revenue stream is currently recognized in the income statement when we provide such services according to the conditions in the contract. We are analyzing whether embedded derivatives may exist as well as significant financial components or other agent or principal considerations as relate to these segments. Upon adoption of the new standard, other potential impacts could be identified as our new revenue accounting policy is developed and applied.

 

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We have yet to complete our evaluation of whether there will be a significant impact as a consequence of this standard’s adoption in the consolidated financial statements.

IFRS 9, Financial Instruments

In July 2014, the IASB issued the final version of IFRS 9 Financial Instruments which reflects all phases of the financial instruments project and replaces IAS 39 Financial Instruments: Recognition and Measurement and all previous versions of IFRS 9. The standard introduces new requirements for classification and measurement, impairment, and hedge accounting. IFRS 9 is effective for annual periods beginning on or after January 1, 2018, with early application permitted. The transition to IFRS 9 differs by requirements and is partly retrospective and partly prospective.

We plan to adopt the new standard on the required effective date. We are analyzing what impact the three aspects of IFRS 9 may have based on currently available information. Our conclusions may be subject to change based on further detailed analyses or additional reasonable and supportable information being made available to us in the future. Upon adoption of the new standard, other potential impacts could be identified as our new revenue accounting policy is developed and applied.

IFRS 16, Leases

IFRS 16 “Leases” was issued in January 2016 and supersedes IAS 17 “Leases” and related interpretations. The new standard brings most leases on-balance sheet for lessees under a single model, eliminating the distinction between operating and finance leases. Lessor accounting, however, remains largely unchanged and the distinction between operating and finance leases is retained. IFRS 16 is effective for periods beginning on or after January 1, 2019, with earlier adoption permitted if IFRS 15 ‘Revenue from Contracts with Customers’ has also been applied. We do not plan on early adopting this standard, but we have determined that the standard will be adopted applying the prospective transitional provisions, which provide that adoption effects will be reflected directly against retained earnings and the applicable assets and liabilities as of January 1, 2019.

Under IFRS 16 a lessee recognizes a right-of-use asset and a lease liability. The right-of-use asset is treated similarly to other non-financial assets and depreciated accordingly and the financial liability accrues interest. This will typically produce a front-loaded expense profile (whereas operating leases under IAS 17 would typically have had straight-line expenses) as an assumed linear depreciation of the right-of-use asset and the decreasing interest on the liability will lead to an overall decrease of expense over the life of the lease.

The lease liability is initially measured at the present value of the lease payments payable over the lease term, discounted at the rate implicit in the lease if that can be readily determined. If that rate cannot be readily determined, the lessee shall use their incremental borrowing rate. However, a lessee may elect to account for lease payments as an expense on a straight-line basis over the lease term for leases with a lease term of 12 months or less and containing no purchase options (this election is made by class of underlying asset); and leases where the underlying asset has a low value when new, such as personal computers or small items of office furniture (this election can be made on a lease-by-lease basis).

We are currently in the process of performing our evaluation of the potential impacts that the adoption of IFRS 16 may have on our consolidated financial statements. As part of such process, we are assessing by reportable segment the different lease contracts, mainly those in which we act as a lessee as well as other contracts in which the definition of a lease could be met independent of our legal form. Based on the ongoing assessment, we may experience a material impact from the adoption of IFRS 16 on our consolidated financial statements ,especially as relates to the Retail Division, the Fuel Division and the Health Division reportable segments, which have significant real estate leases.

We are in the process of quantifying the effects of IFRS 16 as well as developing our accounting policy under the new standard. This process includes evaluating those lease contracts that may qualify for the accounting exceptions provided by the standard for those assets considered as low value and developing judgments on potentially subjective matters, particularly in respect of the definition of a lease and the assessment of a lease term.

 

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Amendments to IAS 7, Disclosure Initiative

The amendments to IAS 7 Statement of Cash Flows, require that the following changes in liabilities arising from financing activities be disclosed separately from changes in other assets and liabilities: (i) changes from financing cash flows; (ii) changes arising from obtaining or losing control of subsidiaries or other businesses; (iii) the effect of changes in foreign exchange rates; (iv) changes in fair values; and (v) other changes. One way to fulfill the new disclosure requirement is to provide a reconciliation between the opening and closing balances in the statement of financial position for liabilities arising from financing activities.

Liabilities arising from financing activities are those for which cash flows were, or future cash flows will be, classified in the statement of cash flows as cash flows from financing activities. The new disclosure requirements also relate to changes in financial assets if they meet the same definition.

These amendments are effective for annual periods beginning on or after January 1, 2017 with earlier application permitted, and entities need not provide comparative information when they first apply them. We are in the process of assessing the potential impacts from the adoption of these amendments on our consolidated financial statements.

Amendments to IAS 12, Recognition of Deferred Tax Assets for Unrealized Losses

The amendments to IAS 12 clarify that an entity needs to consider whether tax law restricts the sources of taxable profits against which it may make deductions on the reversal of deductible temporary differences. Furthermore, the amendments provide guidance on how an entity should determine future taxable profits and explain the circumstances in which taxable profit may include the recovery of some assets for more than their carrying amount.

Entities are required to apply the amendments retrospectively. However, on initial application of the amendments, the change in the opening equity of the earliest comparative period may be recognized in opening retained earnings (or in another component of equity, as appropriate), without allocating the change between opening retained earnings and other components of equity. Entities applying this relief must disclose that fact.

These amendments are effective for annual periods beginning on or after January 1, 2017 with early application permitted. If an entity applies the amendments for an earlier period, it must disclose that fact. We are in the process of assessing the potential impacts from the adoption of these amendments on our consolidated financial statements. We do not expect a significant impact on our consolidated financial statements.

Operating Results

The following table sets forth our consolidated income statement under IFRS for the years ended December 31, 2016, 2015, and 2014:

 

            Year Ended December 31,  
     2016 (1)      2016      2015      2014  
     (in millions of U.S. dollars and Mexican pesos)  

Net sales

   $ 19,335        Ps. 398,622        Ps. 310,849        Ps. 262,779  

Other operating revenues

     42        885        740        670  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total revenues.

     19,377        399,507        311,589        263,449  

Cost of goods sold

     12,189        251,303        188,410        153,278  
  

 

 

    

 

 

    

 

 

    

 

 

 

Gross profit

     7,188        148,204        123,179        110,171  

Administrative expenses

     714        14,730        11,705        10,244  

Selling expenses

     4,634        95,547        76,375        69,016  

Other income

     56        1,157        423        1,098  

Other expenses

     287        5,909        2,741