Executive Summary / Key Takeaways

• The 2026 Mexico Tax Cliff Creates a Competitive Culling: An 87% excise tax increase on soft drinks (from MXN 1.64 to MXN 3.08 per liter) will force a low to mid-single-digit volume decline in COCSF's largest market, but this shock will hit smaller, less efficient competitors harder, positioning COCSF to emerge with enhanced market share when the cycle turns.

• Juntos+ Digital Transformation Delivers Measurable Edge: The AI-powered Juntos+ Advisor sales force automation tool, already adopted by over 40% of Brazil's sales force, has improved geographic efficiency from 92% to 96% and increased average ticket size by 15.8%, proving that COCSF's digital investments translate directly into share gains and pricing power.

• Record Capacity Build Addresses 70 Million Unit Cases of Lost Sales: 2024's MXN 25.3 billion in CapEx (9% of revenue) installed seven new bottling lines and 11 distribution centers to resolve 40 million unit cases of out-of-stocks in Mexico and 30 million in Brazil, converting operational friction into a competitive moat that smaller bottlers cannot replicate.

• Portfolio Pivot to Non-Caloric Shows Pricing Agility: Coca-Cola Zero Sugar's 23-38% year-over-year growth across markets demonstrates COCSF's ability to shift consumer behavior ahead of the 2026 non-caloric tax, while still beverages growing at 20% provide a natural hedge against sparkling beverage taxes.

• Valuation Reflects Transformation, Not Distress: At 7.83x EV/EBITDA with net leverage below 0.8x and ROIC improving to 15.1%, COCSF trades at a reasonable multiple for a business building defensive moats, though execution risks around the tax impact and Juntos+ rollout remain the critical variables to monitor.

Setting the Scene: The Largest Bottler Braces for Regulatory Shock

Coca-Cola FEMSA, with corporate roots extending back to the early 1990s and a board member who has served since at least 1993, operates as the world's largest Coca-Cola franchise bottler by sales volume. The company produces and distributes approximately 4.20 billion unit cases annually to over 276 million consumers across nine Latin American countries through 2.20 million points of sale, 56 bottling plants, and 256 distribution centers. This scale creates a distribution density that regional competitors cannot match, enabling per-unit logistics costs that are materially lower than any peer.

The business model is straightforward: COCSF purchases concentrate from The Coca-Cola Company (KO), manufactures finished beverages, and distributes them through a hybrid system of modern trade (supermarkets), traditional trade (mom-and-pop stores), and on-premise channels. Revenue flows from volume multiplied by price, but the real economic engine is operational leverage—spreading fixed production and distribution costs across an expanding base while using revenue management to protect margins.

COCSF's strategic playbook centers on three pillars: growing the core business through portfolio optimization, taking its digital platform Juntos+ to the next level with AI-powered sales force automation, and fostering a customer-centric culture. This framework has driven consistent share gains, most notably in Guatemala where the company improved its competitive position by over 15 percentage points of share of value in Colas since 2018 while expanding its customer base by 48% over the same period. The "so what" is clear: COCSF has demonstrated an ability to win in difficult markets through execution, not just market growth.

The industry structure presents both tailwinds and gathering storms. Latin America's beverage market is growing at a 3-5% CAGR, but regulatory headwinds are intensifying. Mexico's 2026 tax increase represents the most severe shock, but Brazil faces a selective tax in 2027 and Colombia already implemented an excise tax in November 2023. Simultaneously, consumer preferences are shifting toward healthier options, with non-caloric and still beverages growing at double-digit rates while traditional sparkling drinks face pressure. This bifurcation rewards bottlers with portfolio agility and punishes those tethered to single categories.

Technology, Products, and Strategic Differentiation: The Juntos+ Moat

COCSF's technological differentiation lies not in proprietary beverage formulas but in Juntos+, its digital ecosystem that has amassed 1.3 million monthly active users, with 60% of the customer base actively transacting. The platform's loyalty program, Juntos+ Premia, quadrupled enrolled clients to over 1.1 million in 2024, with 72% actively redeeming points. This matters because it transforms transactional relationships into data-rich partnerships, giving COCSF visibility into end-consumer behavior that traditional bottlers lack.

The Juntos+ Advisor tool represents the next evolution. Developed in Brazil using advanced AI models, it has achieved over 40% sales force adoption by Q4 2024, improving location accuracy, providing real-time inventory data, and increasing SKUs per store. The results are tangible: geographic efficiency improved from 92% to 96%, combined coverage expanded from 46% to 50%, and average ticket size increased 15.8% in Q3 2025. When COCSF rolls this out to Mexico in June/July 2025, it will equip its largest market with the same competitive weapon that is driving share gains in Brazil.

Why does this technology matter for margins? Because it converts guesswork into precision. A sales representative using Advisor knows exactly which stores need which products, reducing wasted visits and optimizing delivery routes. This shows up in the financials as freight cost savings—part of the $90 million in identified 2025 savings—and as higher revenue per customer through better assortment. Competitors like Arca Continental (EMBVF) and Embotelladora Andina (AKO.A) lack comparable digital platforms, giving COCSF a structural advantage in route-to-market efficiency.

The portfolio transformation is equally critical. Coca-Cola Zero Sugar's 23% growth in Mexico and 38% in Q3 2025 Brazil demonstrates that COCSF can migrate consumers to higher-margin, tax-advantaged products before regulatory mandates force the issue. This is not accidental; management has "cracked the code" on Coke Zero after years of underperformance, using targeted promotions and price architecture to drive adoption. The still beverage portfolio, growing at 20% year-to-date with dairy as an outperformer, provides a natural hedge against sparkling beverage taxes while capturing premium pricing.

Operational excellence amplifies these advantages. Mexico's bottling efficiency improved 14% over two years—the equivalent of adding eight production lines without capital cost—while warehouse capacity increased 50% through four new distribution centers. Guatemala added 20% production capacity with two new lines in 2024 and plans two more in 2025. These improvements mean COCSF can serve more customers with existing assets, translating directly into margin expansion even when volumes decline.

Financial Performance & Segment Dynamics: Margin Expansion Amid Volume Decline

COCSF's Q3 2025 results tell a story of resilience. Consolidated volume declined 0.6% to 1.04 billion unit cases, yet total revenues grew 3.3% to MXN 71.9 billion (4.7% currency-neutral). More importantly, operating income increased 6.8% to MXN 10.3 billion, expanding operating margin by 50 basis points to 14.3%. This divergence—growing profits while volumes shrink—demonstrates the power of revenue management and cost discipline.

The Mexico and Central America segment exemplifies this dynamic. Q3 2025 volumes fell 3.7% to 612.1 million unit cases, hit by declining remittances and formal job creation. Yet operating income rose 1.1% to MXN 6.8 billion, expanding operating margin by 20 basis points to 16.0%. How? The segment implemented top-line initiatives focusing on affordability and attractive price points, recovering over six percentage points of share in the modern channel to a record level. Adjustments to price pack architecture in multi-serve refillable packs from July to September 2025 showed encouraging initial results, reversing volume declines in this segment. The "so what" is profound: COCSF can lose volume to macro weakness while gaining share and expanding margins through strategic pricing.

South America delivered even stronger performance. Q3 2025 volumes grew 2.6% to 423 million unit cases, with revenues up 8.7% (12.5% currency-neutral). Operating income surged 19.7% to MXN 3.5 billion, expanding margin by 110 basis points to 11.9%. Brazil's recovery is central to this strength. Despite the temporary suspension of the Porto Alegre plant in May 2024 due to floods, the company has reopened the facility and recovered approximately five percentage points of the eight points of share lost. Coca-Cola Zero grew volumes by 38% in Q3, supported by the Star Wars campaign, while juices and energy posted double-digit growth.

The flood impact reveals management's operational resilience. The Porto Alegre closure cost MXN 889 million in 2024, yet insurance claims and expense controls turned the net impact positive by MXN 56 million for the full year. This demonstrates an ability to manage external shocks without derailing the core business. The additional engineering project to protect the plant from future floods, completing in March 2026, shows lessons learned are being institutionalized.

Cost management is delivering tangible results. The company identified approximately $90 million in savings for 2025, distributed across cost-to-make, cost-to-serve, and portfolio initiatives. As of Q3 2025, the supply chain team had already generated $90 million year-to-date, with $43 million from primary distribution, $32.5 million from cost-to-serve, and $14.5 million from cost-to-make. This matters because it shows the savings are real and trackable, not aspirational targets. Sweetener costs are providing significant relief, with a benign environment expected through 2025, while PET prices are declining and the company is increasing hedge positions beyond 2025 to capitalize.

The balance sheet supports aggressive investment. Net leverage remains below 0.8x, while 2024's record MXN 25.3 billion in CapEx (9% of revenue) funded seven new bottling lines and 11 distribution centers. Management acknowledges this creates an "inefficient capital structure" with excess cash being "consumed" by growth investments, but the strategic rationale is clear: 40 million unit cases of out-of-stocks in Mexico and 30 million in Brazil represent lost revenue that competitors captured. The company is still below its desired 10% capacity slack, indicating these investments are necessary, not discretionary. Return on invested capital improved from 12.7% to 15.1% over recent years, and management expects it to remain "flattish" in 2025 despite record spending, with long-range projections showing continued improvement.

Outlook, Management Guidance, and Execution Risk

Management's guidance for 2026 reveals a clear-eyed assessment of the Mexico tax impact. The 87% excise tax increase, combined with a new MXN 1.5 per liter tax on non-caloric formulas effective January 2026, will create a "challenging year for volume performance." The company expects a low to mid-single-digit volume decline, net of the World Cup's anticipated 5% uplift in volumes during tournament months. This guidance already cycles the 2025 backlash from promotional intensity and includes the brand equity benefit of hosting the World Cup.

Why does management's candor matter? Because it signals a shift from growth-at-all-costs to profitable market share defense. Ian Marcel Craig García explicitly stated that pricing power in Mexico will be limited in 2026, with no expectation of pricing above inflation because "our customers, it's also a big impact for customers and consumers are going to be dealing with that excise tax." This realism is reflected in CapEx delays: distribution center investments in Mexico are being pushed out by two years to avoid unproductive assets in a contracting volume environment.

The strategic response focuses on three levers. First, revenue management initiatives will incentivize migration to non-caloric products through differential pricing and promotional intensity. Management noted that in Colombia, which faced a similar tax increase, COCSF gained share by focusing on key price points and flavor leverages. Second, productivity and cost control measures will extract the identified $90 million in savings while rightsizing the cost structure for lower volumes. Third, the company will leverage the World Cup's brand equity boost to maintain consumer connection despite higher prices.

Brazil's outlook is more nuanced. While consumption is softening, management is not worried about 2026 due to the election cycle, which historically supports consumer spending. The real risk is 2027, when a selective tax on soft drinks takes effect and a potential post-election hangover could depress demand. This two-year window gives COCSF time to consolidate the share gains made during the Porto Alegre recovery and fully deploy Juntos+ Advisor across Brazil's sales force.

Guatemala remains a jewel, with a young, urbanizing population generating more disposable income. The 7.5% volume growth in Q4 2024 and continued outperformance in Q3 2025 demonstrate the durability of the 15 percentage point share gain achieved since 2018. The Juntos+ platform has surpassed 100,000 digital monthly active users, with 73% actively using the app, while Juntos+ Premia loyalty program has over 46,000 clients redeeming points—more than double 2024 levels. This digital engagement creates a direct-to-consumer relationship that traditional bottlers cannot replicate.

The Juntos+ Advisor rollout in Mexico, slated for June/July 2025, represents a critical execution milestone. If the tool can replicate its Brazil impact—improving fulfillment rates by 1.9 percentage points to 94.5% and increasing ticket size by 15.8%—it could offset some of the volume pressure from the tax increase. However, the Mexico sales force is larger and more established in its ways, creating adoption risk that investors must monitor.

Risks and Asymmetries: Where the Thesis Can Break

The Mexico tax increase is the dominant risk, but its impact is asymmetric. While COCSF will certainly suffer volume declines, the pain will be disproportionately severe for smaller, less efficient competitors who lack the digital tools, portfolio breadth, and balance sheet strength to navigate a two-year demand shock. The risk is that the decline proves worse than expected—perhaps high single digits rather than low to mid-single digits—if consumers rebel against the combined impact of the caloric and non-caloric taxes. Management's "shock plan" of savings initiatives suggests they have contingency levers, but there is a limit to how much volume loss can be offset by cost cuts.

Macro deterioration poses a parallel threat. Mexico's Q3 2025 volume decline of 3.7% was driven by declining remittances and formal job creation—trends that could accelerate if the U.S. economy slows. Ian Craig noted that personal consumption expenditure and remittances entered negative territory in Q2 2025, and the company is planning a "more conservative scenario" for the second half. If these indicators worsen into 2026, the tax impact could compound rather than simply add to macro weakness.

Competitive response during COCSF's volume weakness is a tactical risk. PepsiCo (PEP) and Arca Continental could intensify promotions to capture shelf space and consumer trial, making it harder for COCSF to recover share post-tax. In Mexico's modern trade channel, COCSF has already recovered share to record levels, but the traditional channel remains contested. The biggest gap is in the MXN 20 price point, where Pepsi's 750ml and Red Cola's 2-liter compete directly. If competitors use the tax disruption to permanently reset price expectations, COCSF's pricing power could be impaired beyond 2026.

Juntos+ execution risk is real. The tool worked in Brazil because it was developed there with local sales force input. Rolling it out to Mexico's larger, more heterogeneous sales force could face technical integration issues, user resistance, or simply different market dynamics that limit its effectiveness. If adoption stalls or the promised efficiency gains fail to materialize, COCSF would lose a key competitive advantage just as it needs it most.

Currency and commodity volatility remain background risks. While COCSF has hedged 35% of FX exposure for 2025 (70% in Colombia) and over 90% of sweetener needs, the Mexican peso's depreciation could increase the cost of imported inputs like aluminum. Management noted aluminum is showing "a little bit of pressure," and while it represents a small portion of the mix, any unhedged commodity spike during a period of limited pricing power could compress margins.

The capacity overbuild risk is temporal. If 2026 volumes decline more severely than expected, the new lines installed in 2024-2025 could become stranded assets, depressing ROIC and forcing write-downs. Management's decision to delay distribution center investments shows they recognize this risk, but the bottling lines already installed cannot be uninstalled. The bet is that the two-year tax impact passes and volumes recover, making the capacity valuable. If the tax proves permanent in its demand destruction, COCSF will have overcapitalized.

Valuation Context: Reasonable Multiple for a Defensive Transformation

At current levels, COCSF trades at 7.83x EV/EBITDA with an enterprise value of $21.16 billion and a market cap of $18.38 billion. The 0.57x debt-to-equity ratio and net leverage below 0.8x indicate a conservative capital structure that can absorb the 2026 earnings shock. The 35x P/E ratio reflects the market's anticipation of near-term earnings pressure from the tax, while the 1.33x EV/revenue multiple is in line with bottling peers.

Comparative positioning provides context. Arca Continental (EMBVF) trades at 6.71x EV/EBITDA with a higher operating margin of 16.41% versus COCSF's 13.93%, but Arca's geographic footprint is more concentrated and it lacks COCSF's digital platform. Embotelladora Andina's regional focus makes it more vulnerable to single-country shocks. PepsiCo (PEP) commands a premium 14.41x EV/EBITDA and 28.20x P/E due to its global diversification and snacks business, but its Latin America beverage operations face the same tax pressures without the same localized execution capability.

The key metric is ROIC, which improved to 15.1% and is expected to remain "flattish" in 2025 despite record CapEx. Management's long-range projection accounts for continued ROIC improvement, suggesting the current investments will generate returns once the tax headwind passes. The $90 million in identified savings for 2025, with $90 million already achieved year-to-date, shows management can extract efficiencies to offset margin pressure.

Free cash flow generation remains robust, with 2024's MXN 25.3 billion in CapEx representing a strategic choice to invest in growth rather than a requirement to maintain the business. The company's ability to fund this internally while maintaining leverage below 0.8x demonstrates financial flexibility that smaller competitors lack. This matters because it means COCSF can continue investing through the 2026 downturn while others retrench.

Conclusion: A Fortress Built for the Storm

Coca-Cola FEMSA is not navigating the 2026 Mexico tax increase; it is building a fortress to withstand it. The company's strategy—combining digital transformation through Juntos+ Advisor, portfolio pivot to non-caloric beverages, operational efficiency gains, and strategic capacity investments—creates a multi-layered defense that smaller, less sophisticated competitors cannot replicate. While volumes will decline and margins will face pressure, the asymmetry of pain favors COCSF.

The critical variables for investors to monitor are the pace of Juntos+ Advisor adoption in Mexico and the depth of volume decline in the first quarter of 2026. If the digital tool replicates its Brazil impact, COCSF could offset 2-3 percentage points of volume loss through share gains and ticket size growth. If the tax impact proves more severe than the guided low to mid-single-digit decline, management's "shock plan" of savings will be tested, but the balance sheet strength provides cushion.

Valuation at 7.83x EV/EBITDA appears reasonable for a business undergoing this defensive transformation, particularly given the 15.1% ROIC and sub-1x leverage. The real investment thesis is not about 2026 earnings, but about 2027-2028 market share when the competitive landscape emerges with fewer, stronger players. COCSF's digital moats, capacity investments, and portfolio agility position it to be among the survivors—and ultimately, the winners. The company has faced external headwinds before, from floods in Brazil to hurricanes in Mexico, and each time it has emerged with improved efficiency and market position. The 2026 tax earthquake will be no different.