It seems like soft drink powerhouses Coca-Cola Co (KO) and PepsiCo (PEP) are betting heavily on Mexico. Both companies recently announced huge investments in the country.

Mexico has one of the highest obesity rates in the world and the government has undertaken several measures to promote a healthier lifestyle. Major food and beverage (F&B) companies are hoping to leverage the incentives provided by the government to build a healthy portfolio in the region.

Besides these two, Dr. Pepper Snapple (DPS) has also made significant investments in the country and is witnessing a healthy revenue growth.

PepsiCo recently announced its plan to invest $300 million through its Mexican subsidiary Sabritas SRL de CV to bolster the healthy snack segment and to set up a product research center on healthier snacks. The new center will provide research not only for its products in Mexico but for the global portfolio of products as well. It is a step in the right direction as we expect governments around the world to crack down on companies contributing to obesity. Besides, more people will align themselves with products they view as healthy or natural.

We maintain a price estimate of $71 for PEP, which is about 8% above the current market price. (See also our complete analysis of PepsiCo.)

Pepsi's Frito-Lay Brands dominates the North American snacks market, commanding a market share of more than 65%. We expect the figure to rise to 65.8% by the end of the Trefis forecast period. Given that the North American snacks market is huge and slated to grow at a healthy rate, this is a significant revenue addition for the company.

 

Coca-Cola has also announced its decision to spend $1 billion in Mexico this year. Although the investments will be spread across the portfolio, the company intends to put a greater focus on bottled water. Bottled water is a huge market in Mexico; Mexicans consume 243 litres per person in a year, compared to the U.S.'s 110 litres. Moreover, we expect the bottled water market to rise to $13 billion, up from $9 billion presently.

Coca-Cola operates in the bottled water market in Mexico through its brand Ciel. Soft drink sales have been affected in the country due to harsher regulations by officials on the beverage companies, including banning the sale of soft drinks in schools. Currently, the bottled water is available in single serves, which refer to 1 litre or 1.5 litre bottle, and jugs, which come in 10 or 20 litres. The companies plan to focus heavily on the single serves since their price, on a per unit volume basis, can be 10 times more than the jugs. Coca Cola also plans to extend Ciel to incorporate new flavors.