John Ewart, Fund Manager of the Aubrey Capital Management Global Emerging Markets Fund, highlights why he’s got the bottle to back two holdings, Coca-Cola FEMSA and Arca Continental, in his investment portfolio
Who would have thought the vices of the Prime Minister, Rishi Sunak, extended to the Coca-Cola beverage? This revelation during an interview in 2019 provided an insight into his consumption behaviour whilst a student at Stamford. PM Sunak is in good company as we have all seen the memorable advertising and probably at least tried the various offerings in our lifetimes.
From the cute polar bear mascots through to Taylor Swift and her open refrigerator of diet coke, to the latest New Jeans K-Pop band launching a music single called ‘zero’. Coca-Cola is a genuine global brand, and their operations have been supported by regional and global ambassadors, new product launches, and expanding their country presence. Today, Coca-Cola has 225 bottling partners operating across 900 bottling plants and serving 2 billion drinks per day in more than 200 countries.
There is a concentration amongst the partners, with the largest 5 accounting for over 40% of total case volume. Mexican entities Coca-Cola FEMSA and Arca Continental serve Latin America; Europacific Partners (CCEP) caters to Western Europe, Australia, Pacific and Indonesia; Coca-Cola Hellenic addresses Eastern Europe; and Swire Beverages, addresses Asia and parts of North America.
The bottling operating process requires more than simply adding the secret syrup to a production line. Extensive investment has been required to ensure efficient bottling capacity across an increasing number of Coca-Cola brands and drinks containers. A secure distribution network catering from the local ‘mom and pop’ stores to the multinational hypermarkets, and the increasing need for a recycling network has been established.
The Aubrey GEMs portfolio currently holds positions in the two Mexican bottling companies, Arca Continental and Coca-Cola FEMSA. This country has been one of the success stories of the Coca-Cola bottling model.
Arca merged with Grupo Continental in 2011 to cater to the northern states of Mexico and selected Latin American countries. Then in 2017, the group acquired an operation in the southwest region of the USA resulting in todays’ revenue mix of 41% Mexico, 35% USA, and 19% in LATAM, with 5% from the snacks product category. The forerunner to the current group has had a relationship with Coca-Cola since 1926. Arca has been successful in the expansion of their other brands and their portfolio now covers over 160 brands and over 1700 products with mineral water Topo Chico proving a current favourite.
Coca-Cola FEMSA (KOF) is the larger of the two companies by beverage revenues and their geographic mix has Mexico & Central America accounting for 60% of volume and Central & South America generating 40%. KOF was created in 1993 when the parent FEMSA created the division. Coca-Cola Inc retains a 28% stake in KOF, having been an initial investor in the business.
Both companies deserve credit for the development of their ESG initiatives and both score well on our proprietary analysis. A reduction in water consumption per litre of production has been a key target. As has GHG emission reductions and increased recycled resin in bottle usage, which compliment the extensive social initiatives in the local communities which are a feature of many Mexican companies.
The various listed bottling entities extend from Chile through Europe and to Japan, but not all the operators have enjoyed the success of the Mexican operators.
The Coca-Cola Hellenic company is the Greek domiciled operator that had looked to various emerging countries to expand their business but unfortunately this included Russia. Following the invasion of Ukraine, the company ceased operations and the value of the business adjusted accordingly. Coca-Cola Içecek is the Turkish listed operator of bottling assets in Turkey, but most of the operations now reside in Pakistan, Kazakhstan and Uzbekistan. Whilst we acknowledge the population and economic growth potential in these countries, the events of recent years have served to remind investors of the importance of political and currency risk, and Aubrey had no exposure to Russia or Turkey over the last 5 years for this reason.
With a history of M&A in the industry, further consolidation will continue to be a contributory factor to the growth outlook. Coupled with the longevity of relationships with the Coca-Cola parent, the successful investment programmes and the portfolio innovation in areas such as product packaging and data management, we believe both Arca Continental and Coca-Cola FEMSA continue to represent attractive investment opportunities.
About John Ewart
John, who joined Aubrey in early 2012, is a Director and Fund Manager covering global markets. He is a graduate of the University of Strathclyde, with a BA in Economics and, additionally, is a member of the CFA Institute.
John has over 30 years’ investment industry experience across global equity markets. He joined Glasgow-based FS Assurance in 1988, and managed equity portfolios in the UK retail and pension fund market. He then moved to First State Investments in 2000 to manage retail and segregated European client portfolios. In 2004, he moved to Alliance Trust PLC and was a member of the Global Equity Team and subsequently responsible for the Global Emerging Markets portfolio.