OXXO Sweet on Texas

Mexico's FEMSA confirms plan to open 900 c-stores in Lone Star State, if ...

Greg Lindenberg, Editor, CSP

FEMSA OXXO Mexico (CSP Daily News / Convenience Stores / Gas Stations)

MONTERREY, Mexico -- Demographics is the main rationale for FEMSA's intention to expand into the Lone Star State.

As reported in a 21st Century Smoke/CSP Daily News Flash, Fomento Económico Mexicano SAB de CV, owner of the OXXO chain of convenience stores in Mexico, confirmed in a statement that it plans to invest approximately $850 million to open 900 c-stores in Texas.

The company is "constantly analyzing the different opportunities that may be available for [its] businesses, including within the Texas market," it said.

"We have more than 1,000 OXXO stores right on the border, on the south side of the border, and zero on the north side," Juan Fonseca, FEMSA's head of investor relations, said on the company's first-quarter 2015 earnings call. "You can make the case that the consumer on both sides of the border is more or less the same demographic. And so the brand recognition and the attractiveness of that market to at least do some meaningful tests is very compelling."

Texas is the "most attractive" U.S. state for FEMSA, he said, as "most of the Mexican border with the U.S. is Texas, certainly, the two-thirds on the eastern side of the country. … So we're having conversations with the state of Texas."

That expansion, however, remains contingent upon changes to alcoholic beverage laws in the state of Texas that prohibit retailers of alcohol from being owned by firms with ties to the liquor industry.

FEMSA is the largest independent Coca-Cola bottler in the world and an investor holding the second largest equity stake in brewer Heineken.

In September, a Texas appeals court upheld a decision barring OXXO from obtaining a state license to sell alcohol, ruling its corporate parent’s indirect and partial ownership of Heineken violates cross-ownership rules.

The decision from the Austin Court of Appeals said broadly written statutes preclude the same company from owning both an alcohol manufacturer and retailer, despite multiple layers of corporate separation and even when there is no evidence one entity can exert any control over the other.

The ruling bars a permit for OXXO’s Texas subsidiary, Cadena Commercial USA Corp., because OXXO is owned by FEMSA, and FEMSA in turn has an indirect stake in the parent company of Heineken, which hold a Texas manufacturer’s permit.

The court rejected OXXO’s argument that the law requires a common owner to have a controlling interest in multiple tiers—retail, distribution and manufacturing—to be barred from a permit, and said FEMSA’s ownership interest in both OXXO and Heineken is significant.

In its statement, FEMSA said, "We have requested the appropriate governmental authorities for an authorization to sell alcoholic beverage products in small-format retail stores in Texas, [and] such [a] request is currently being reviewed by the courts of Texas. We have also presented our arguments to legislative and executive bodies for them to consider an amendment to the law that would more clearly allow FEMSA Comercio to sell alcoholic beverages in Texas than present law."

FEMSA continued, "If these efforts are successful, and provided that the economic and regulatory environment permits it, FEMSA Comercio estimates that in the first 10 years, approximately $850 million could be invested by the company for the opening of 900 retail stores in Texas."

Fonseca said, "The 20% interest in Heineken, in the view of the state of Texas, currently qualifies us as having a significant influence over the production of alcohol, and therefore, they're happy to let us open stores, but those stores would not be able to sell alcohol. And that's a competitive disadvantage. … We're trying to make the case that we don't exercise control over Heineken. We are making the case that we would be willing and able and happy to make significant investments in Texas over time. So we're trying to convince them that this would be a good idea. It's hard to say which direction that's going to go."

FEMSA does operate one OXXO convenience store in Texas, which it opened in Eagle Pass in May 2014, which at the time it called a "proof of concept" rather than a pilot. Fonesca said the company opened that store "as part of the conversations with the regulators and the government. It's not really a proper OXXO store, and obviously, it doesn't sell alcohol."

Monterrey, Mexico based OXXO operates approximately 12,400 c-stores in Mexico and Central America.