By Elinor Comlay
MEXICO CITY (Reuters) – Shares of Mexico’s biggest bottling company fell on Thursday as Congress approved a 1 peso-per-liter tax on sugary drinks and an 8 percent tax on junk food as part of a wider tax overhaul.
The plan, which was passed by lawmakers after markets closed, aims to curb rising obesity levels as well as lift Mexico’s poor tax take.
Shares of Mexico-based Coca-Cola Femsa, Coke’s largest bottler in Latin America, closed down 1.28 percent at 159.02 pesos.
Mexico, where obesity rates are now higher than in the United States, will be the first major soda market to tax high-calorie sodas, following a handful of other Latin American and European countries.
Mexicans are the world’s biggest soda drinkers, guzzling about 707 8-ounce (0.24 liter) servings, on average, per year, according to U.S. newsletter Beverage Digest. The United States is the only other country in the same ballpark, clocking in at 701 servings.
Drink and snack food companies are expected to pass on the tax to consumers, which could put further pressure on economic growth which has slowed this year in Mexico, hurt by a drop in consumer spending.
Coke Femsa executives said on a call last week that they would pass on the tax by raising prices broadly between 12 and 15 percent.
“We think the industry will do the same thing because it’s a heavy tax,” Chief Financial Officer Hector Trevino told analysts on a call.
“Our operators are already looking at some of the strategies that we’ll follow for next year and that includes doing a full reconfiguration of our whole portfolio, even doing some downsizing,” Trevino added.
The company said it could reduce its workforce by around 3 or 4 percent and cut back on distribution routes.
Coca-Cola controls more than three-quarters of Mexico’s drinks market and stands to be hit the hardest by the soda tax, according to Beverage Digest.
Much smaller players in the market include PepsiCo and Dr Pepper Snapple Group.
Coke Femsa did not respond to requests for comment, while a spokeswoman for Coca-Cola referred calls to Mexico’s beverages association ANPRAC.
Mexico’s tax could be a “game changer” as “the first of the large soft-drink consumer markets to impose a significant excise tax on full-calorie soft drinks,” wrote analysts at Credit Suisse in a report last month.
Other countries and jurisdictions may consider following suit, according to the Center for Science in the Public Interest.
Telluride, Colorado’s 800 registered voters will weigh in on a proposal to put a 1-cent per ounce tax on sugary drinks on November 5, sponsor Elisa Marie Overall said. If it passes, the small ski resort town would be the first in the United States to institute such a tax. There also is a move afoot in San Francisco to put a proposed 2-cent per ounce soda tax on the ballot in November 2014.
Mexico’s one peso per liter tax is the equivalent to about 0.23 cents per U.S. ounce. A liter of Coke – 33.8 U.S. ounces – costs about 12 pesos ($ 0.92).
Soda tax proposals in Richmond, a San Francisco Bay Area city, and El Monte, located east of Los Angeles, failed last year after industry groups descended on the California towns.
New York City Mayor Michael Bloomberg last year spearheaded a ban on the sale of large, sugary drinks, but a state judge declared the effort illegal after a challenge by soft drink makers and a restaurant group. New York’s highest court has agreed to hear an appeal.
Most soft-drink and food companies will self regulate and promote diet versions of their drinks as well as offering more alternative drinks such as juices, vitamin waters or just smaller sizes, said analysts in the Credit Suisse report. ($ 1 = 12.9992 Mexican pesos)
(Reporting by Elinor Comlay, additional reporting by Lisa Baertlein in Los Angeles and Martinne Geller in London; Editing by Bernard Orr)
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