FMX: Look At This Retail Winner From South Of The Border

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Fomento Económico Mexicano (FMX), known as FEMSA, is a very interesting company that traces its origins to an 1890s brewery in the city of Monterrey, Mexico. Now a Mexican multinational beverage and retail conglomerate headquartered in Monterrey, FEMSA operates the largest independent Coca-Cola bottling group in the world as well as the largest convenience store chain in Mexico.

The holding company owns controlling stakes in four entities: bottler Coca-Cola FEMSA (KOF) with a 47% economic stake and 56% of voting rights; FEMSA Comercio (100% owned), including the Oxxo small-format retail store chains, pharmacies, and gas stations with over 20,000 outlets; CB Equity (the second-largest Heineken (HEINY) shareholder, with a 14.8% stake); and logistics and distribution operations serving the U.S. and Latin American markets. Coca-Cola FEMSA and the Oxxo chain combined to make up 70% of total company revenue and 86% of profits in 2021.

Yet, despite its long history, FEMSA is undergoing a makeover and a renaissance. Let me explain.

The Old and New FEMSA Together

In March, FEMSA unveiled its plan to focus on long-term strategic priorities in retail and beverage bottling and divest all its non-core assets over the next 24 to 36 months. Following all the divestitures, the company’s simplified operating structure will include only Coca-Cola FEMSA and FEMSA retail, making up 32% and 68% of operating profits, respectively.

FEMSA began selling its stake in Heineken as part of this broader strategic review. The company’s shares have risen about 8% since the news, after underperforming the index in the past two years, as investors welcomed a return to its core businesses of retail and Coca-Cola bottling.

The ongoing sale of Heineken shares has already provided about $3 billion in extra cash, part of which will go to pay down debt. FEMSA’s stake in Heineken meant it was not allowed to sell alcohol directly to consumers under U.S. state laws. But now, FEMSA is looking at expanding its convenience stores into the U.S.

This part of its makeover looks quite typical. But here is where FEMSA management—if it can pull this off—could find a proverbial gold mine, as explained in a recent Financial Times article by Christine Murray…

The company plans to use its vast network of Oxxo outlets as the springboard for an ambitious push into financial services in Mexico. Keep in mind that less than half the adult population in Mexico has a bank account.

And it has been so far, so good for FEMSA. The Company has been encouraged by the initial success of its new digital debit card, which has attracted almost four million customers since its launch in 2021.

It will be a challenge for the company though as Mexico remains the most cash-oriented country in Latin America, thanks to its large informal workforce and a traditional mistrust of banks. Even at Oxxo outlets, nearly 80% of all transactions are still made in cash.

But luckily for the company, Oxxo stores are ubiquitous and trusted—even in the many smaller Mexican towns. It has the largest network of small-format neighborhood stores in Latin America. Customers go there to buy drinks and snacks, along with paying their bills and credit cards or conducting other banking-type services.

Here is how Morningstar analyst Dan Su described the Oxxo shopping experience:

To its target consumers (more than 60% in the 15-35 age group), the main appeal of an Oxxo store rests in a convenient location (close to residential areas, office buildings, higher education institutes, and transportation hubs) and a quick and easy shopping experience made possible by a small selling area and carefully curated stock-keeping units…For shoppers who are pressed for time and not very price-sensitive, the Oxxo chain becomes their go-to place by offering an alternative shopping venue to efficiently purchase refreshments and daily necessities, in addition to an occasional impulse purchase for indulgence or new product discovery. Over the years, Oxxo has added essential services including utility bill payments, bank deposits, remittance, and telecom service prepayments, making the stores an integral part of daily life for people living or working in the neighborhood. 

By early March, the company had announced that 1.6 million additional people had signed up for Spin, the Oxxo app that allows users to send and receive money. That rush of sign-ups made Oxxo one of the fastest-growing debit card companies in Mexico. For Spin, the vast majority of sign-ups were made in those Oxxo stores.

FEMSA’s network of well-known stores (serving 1.3 million people daily), combined with the lower regulatory requirements of a fintech license that made opening accounts easier, puts it in a unique position. Bear in mind, too, that there are more Oxxos in Mexico than branches of all commercial banks combined.

The company also wants to sell financial services to the small traditional stores that are key clients of Coca-Cola FEMSA. This strategy is to offer terminal payments through its subsidiary NetPay and offer store owners the Spin app to take payments.

FEMSA should have little competition from larger financial services firms, like banks. That’s because the small transaction size from Spin customers would not interest a traditional bank.

So, if Spin continues to be such a success—and hits its initial 10 million customer target—the company envisions that, in the near future, it could start providing loans and insurance through many of its Oxxo stores as well as in other smaller traditional Mexican stores.

This move into fintech in Mexico will support FEMSA’s competitive position in retail and its growth outlook over the longer term.

This makes FMX stock a definite buy. It can be purchased anywhere in the $90 to $100 range. And it has a 1.8% yield, too.

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