Mexico Has Some Bad News for Coke and Pepsi

By Jeremy

You can score another defeat for TheCoca Cola Co andPepsico in the soda wars.

Results are in from a controversial soda tax in Mexico, and it appears to be achieving the outcome that health advocates had hoped for. Mexico passed the tax in 2013, which adds a 1-peso charge, or about $0.06 to bottlers for every liter of sugar-sweetened soft drinks distributed, adding about 10% to the price.

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According to researchers from the University of North Carolina, soda sales in Mexico fell 6% last year, and the decline accelerated over the course of the year, reaching 12% in December. The study also noted that the drop-off was most pronounced among low-income Mexicans, falling by as much as 17% and suggesting that the tax itself was the cause for declining sales and not publicity or changing attitudes.

Mexican Coke isn't flying off the shelves as fast as it used to.

Though the effects of a small tax south of the border may be dismissed by some industry advocates, Mexico is no ordinary country when it comes to the soda wars. Our neighbors to the south have embraced American eating habits more than any other nation. In 2013, it became the most obese country in the world, passing the United States, and also led the world in soda consumption as of 2011. At that time, its per-capita consumption was 163 liters a year, or 40% greater than the U.S.With a population of 122 million, Mexico is also one of the highest global consumers of the fizzy stuff. That high consumption rate and the obesity and health epidemics like diabetes and heart disease that sprang from it are exactly what prompted the soda tax in the first place. Now, health advocates in the U.S. see a strong argument for imposing such a tax stateside.

The new cigaretteIt's become trite by now to draw analogies between soda and cigarettes, but the latest evidence from Mexico ties the two even more closely together. Cigarette taxes went through similar political battles as tobacco companies fought fiercely against them, but the evidence is clear. Cigarette taxes, which range as high as $4.35 a pack in New York at the state level and $6.16 in Chicago at the local level, have had a pronounced effect on sales. A 10% increase in cigarette prices on average leads to a consumption decline of 3-5% and has the added bonus of deterring kids from ever trying smoking in the first place.

Currently, the only soda tax in effect in the U.S. is in Berkeley, Calif. The penny-an-ounce tax was passed overwhelmingly last year, and brought in a $116,000 in revenue for the small city in its first month in March.However, a recent study by Cornell and the University of Iowa found the tax was often ignored, and in many cases less than half of the cost was being passed on to consumers. The researchers found that in the case of Coke and Pepsi, only 22% of the tax was being passed on. One problem could be concerns about cross-border competition as vendors may be worried that their customers can simply visit one of Berkeley's neighbors to avoid the tax. Overall, however, researchers say Mexico's tax offers a much more conclusive result than Berkeley's.

What's a beverage giant to do?With other municipalities threatening to follow in Berkeley's footsteps, soda consumption is only likely to continue declining as health concerns mount.

In the face of falling favor for their trademark product, Coke and Pepsi have done the logical thing and diversified away from soda. Coke has taken steps to branch out including making investments in KeurigGreen MountainandMonster Beverage while Pepsi counts major food brands such as Tropicana, Frito-Lay, and Quaker under its corporate umbrella. Just this week, both Pepsi and Coke were said to be battling to take stakes in greek yogurt-maker Chobani, though Coke has since backed out, saying it prefers to stay within beverages.

Both soda giants have seen the light. Though carbonated drinks will continue to generate gobs of cash flow for each of these corporate titans, future growth will have to come from outside of soda.

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Jeremy Bowman has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Monster Beverage and PepsiCo. The Motley Fool has the following options: long January 2016 $37 calls on Coca-Cola, short January 2016 $43 calls on Coca-Cola, and short January 2016 $37 puts on Coca-Cola. The Motley Fool recommends Coca-Cola and Keurig Green Mountain. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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