Inside Mexico`s Processed Food Industry

FOOD INDUSTRY
30
MEXICONOW
NOVEMBER - DECEMBER 2015
FOOD INDUSTRY
Inside Mexico’s
Processed Food Industry
Appetizing Potential & Challenging
Value Chain Recipe
By Sergio L. Ornelas
Editor MEXICONOW
T
oasted grasshoppers for dinner anyone?
A delicacy from Oaxaca that is sold in most major food
stores in Mexico and exported to other continents was born when
two young food engineering graduates processed the protein-rich
“Chapulines”, a favorite dish of the Aztecs in pre-Hispanic times.
Mexicans love to eat.
The average household in Mexico spends about 25% of its
income in food. In comparison, the U.S. is at 12%, while India
and Spain are at about 30% and 20% respectively. These data are,
of course, largely determined by the level of per capita income in
each country and not by the appetite of its citizens.
Regardless, Mexicans love to eat, although not necessarily the
healthiest foods on Earth. Mexico is the #1 consumer of sugary
soft-drinks in the world and has the #2 position in obese population
(24%) among OECD countries, just behind the U.S. (30%) and
far from last place Japan (3%).
Nonetheless, Mexicans love to eat. The rich and diverse cuisine
in Mexico has its roots in the family which traditionally gathers
for most mealtimes. Food is part of the Mexican culture and
one of the main reasons why Mexicans rank among the happiest
people in the world.
Yes, a tasty dish of chicken with “Mole Poblano” or a delicious
taco of “Cabrito al pastor” can make the day for many people in
Mexico in spite of work or family stress, government blunders
and other life hassles.
It is then not surprising that the processed food industry in
Mexico is a thriving one.
Food processing is the transformation of raw ingredients by
physical or chemical means into food products that can be easily
prepared and served by the consumer. Its benefits include toxin
removal, preservation, consistency and ease of marketing and
distribution.
In addition, it allows year-round availability of seasonal
foods, enables transportation of delicate perishable foods across
long distances and reduces the risk of illnesses by de-activating
pathogenic micro-organisms.
Without modern food processing techniques, supermarkets
would not exist and long voyages would not be possible. People’s
leisure time would be significantly shorter also, as process food
is prepared in a lot less time compared to cooking natural foods.
Processed food does not come without drawbacks though,
including: Reduced nutritional density, health risks of food
additives, metal contamination from large production equipment
and toxification from adultered packaging or spoiled raw materials.
Even addiction to certain foods occurs, as manufacturers use
salt, sugars and other additives in clever formulas to create craving
and increase consumption, and of course, sales.
The spectrum of the food processing industry is thus quite
ample. In this article we will review this industry in Mexico, along
with its main trends, challenges and opportunities. It is indeed an
appetizing subject.
The economics of calories
Please note that this article is about processed food only and
does not include beverages of any type in the economic data.
The world’s population of roughly 7.28 billion consumed
approximately US$4.9 trillion worth of processed foods in
2014. That equals to about US$673 per individual per year,
but this amount varies wildly from several thousand dollars in
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FOOD INDUSTRY
food industry in Mexico in manufacturing
plants and logistics locations.
Global Production Outlook
Processed Food Industry 2013-2020 (US$ Billion)
2016
2017 2018
2019
2020
forecast
Source: IHS
EXHIBIT 1
Mexico’s production forecast for
2020 is shown in Exhibit #2, and
according to IHS, processed food will be
at about US$179 billion by then, which
is not as fast growing as the world’s, but
still performs at a very healthy average
annual growth rate of 4.5%.
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2014-2020 (US$ Billion)
CAGR:4.5%
143
In Mexico, processed food
production reached US$138 billion
i n 2 0 1 4 . Wi t h a p o p u l a t i o n o f
approximately 123 million, the per
capita consumption of processed foods
was US$1,122 which almost doubles
that of the world’s. Production and
consumption figures in Mexico are
pretty much the same.
The composition of the subsectors
makes for myriad delectable stories. For
example, the bakery and tortillas segment is
served in one extreme by the largest bakery
in the world, The Bimbo Group (US$14
billion in sales and 130,000 employees)
and in the other end by literally hundreds of
thousands of micro factories, Mom & Pop
operations of bread and tortillas.
Mexico´s Processed Food Production
141
If the population of the world rises to
about 7.67 billion by that time, then the per
capita consumption of processed food will
leap to US$1,023 in 2020. So this is a hot
industry to say the least, and yes, most of
the growth of people and processed food
production and consumption will be in the
Asia –Pacific region.
Mexico is the third largest producer of
processed foods in the American Continent,
behind the U.S. and Brazil. Over 800,000
workers are supported by the processed
138
According to IHS, a global forecasting
firm, worldwide production and
consumption of processed food will enjoy
an impressive annual average growth rate
of 7.6% during the next 5 years to reach
approximately US$7.85 trillion in 2020,
please see Exhibit #1.
The World Bank estimates that
Mexico’s population will be close to
132 million in 2020, which would make
the per capita production/consumption
of processed food stretch to a level of
US$1,356.
137
developed countries to just a few dollars
in the poorest economies.
The main sub-sectors of the industry
are shown in Exhibit #3. Production of
bakery products and tortillas lead with
a 26.9% share, closely followed by the
slaughter, packaging and processing of
livestock, poultry and other edible animals
with 25.8% share. In third place with a
10.6% share are dairy products.
2013 2014 2015 2016 2017 2018 2019
179
2015
The growth in demand of processed
foods in Mexico can be attributed to
factors such as a growing middle-class,
available agricultural resources, low
manufacturing costs, ample production
capacity, increasing income levels and
changing of life styles as more women
enter the labor force reducing time to
prepare natural meals at home.
174
2013 2014
5,750
6,745
167
4,697 4,911
5,278
6,224
7,850
158
CAGR: 7.6%
7,280
Mexico is the eighth biggest food
processing country in the world and its
output represents 12% of the manufacturing
gross domestic product (GDP) and about
4% of Mexico’s total GDP.
2020
forecast
EXHIBIT 2
Source: IHS
FOOD INDUSTRY
Mexico´s Production by Industry
2013 (% Share)
Others
Preparation of fish
and seafood
0.9
Fruit, vegetables
and prepared
foods
Sugar, candies,
sweets
and chocolates
3.86%
10
21%
10.6
25.8
Meat and poultry
processing
Dairy processing
Source: National Accounts, INEGI
For the dairy sector, you will find
two amusing stories in this issue of
MEXICONOW: one about flatulent cows
and the environment and another about the
processed milk and derivative products
value chain by Alpura, a leading dairy
industry producer in Mexico.
And for the high end of food and
innovation, see our zero calories story
about METCO and its natural sweeteners
like Svetia and Diabe-sugar.
An irresistible cake
represent a strong gravitational force
to attract foreign investment from
multinationals, including the biggest in
the world: Nestle (Switzerland), Danone
(France), Unilever (U.K.) and an endless
parade from the U.S. boasting Kraft,
General Mills, Kellog, Heinz, PepsiCo,
Mars, Campbell and many others.
Please see our two-page spread map
in this article illustrating the location of
And as one can imagine, 123 million
Mexicans with a relative good annual
per capita income of about US$11,000
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Interestingly and uncommonly enough,
the U.S. is not the leader in FDI in
Mexico’s processed food industry. The
first place belongs to the Netherlands, led
by Nestle, with a whooping US$14 billion
total in the past 12 years, compared to
Switzerland and the U.S. at about US$4.5
billion each.
The process of natural ingredients is of
course a favorite of FDI as grains, seeds,
oil, fats, fruits and vegetables are the
segments with the lion’s share as shown
in Exhibit# 5.
Bear in mind that, true of most
industries but of particular importance to
our subject matter, the ideal situation for a
value chain is to have the closest location to
both the raw materials and the customers.
FDI Evolution in Mexico’s Food Industry
2014-2020 (US$ Million)
Unequivocally, processed food is the
industry where you will find the largest
number of Mexican entrepreneurs, both in
large scale operations as well as small and
medium size firms.
Besides Bimbo which operates 170
factories in 22 countries across the globe,
other large Mexican owned corporations
include: Gruma (US$4 billion in sales,
20,000 employees, flour and tortillas),
Bachoco (US$3 b/ 25,000 emp. / poultry
products), Lala (US$3 b/ 35,000 /dairy),
Sigma (US$4 b/ 33,000/ meats), Herdez
(US$1 b / 6,000 / canned food), Bafar
(US$600 million / 10,000 / meats) among a
total of 20 Mexican companies with annual
sales over US$500 million.
According to Mexico’s Ministry of the
Economy, there has been a total of US$16.4
billion worth of foreign direct investment
(FDI) inflows to Mexico during 2004-2014
in the processed food sector.
You will notice in Exhibit#4 the
unevenness of such inflows through the
years, suggesting that, other than large
isolated projects, many of the investments
happened in years prior to 2004 as this is
clearly a mature industry.
26.9
4%
Processed Food
44%
6.7 7% Production
2013:
US$137,182 million
8%
Grains and oilseeds
EXHIBIT 3
3%
15.3
4%
Bakery products
and tortillas
3%
operations of the main processed food
manufacturers in Mexico.
6,142
3,640
1,685
1,051
1,548
602 333
151
-168
976
433
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
EXHIBIT 4
Source: Ministry of Economy
FOOD INDUSTRY
Mexico´s Accumulated FDI Inflows
by Type of Activity, 2004-2014 (US$ Million)
Meat processing
Animal feed products
3.34%
Dairy products
Sugar, candies,
sweets
and chocolates
35.56%
13.73%
28.84%
Fruit, vegetables
and prepared foods
Butter or Margarine?
Undoubtedly, one of the main
controversies about processed foods has
to do with the power of multinationals
over the processed food industry. This
power involves their huge influence
along the value chain, from the control
and accumulation of seeds, grains and
other raw materials to the manipulation of
consumers’ tastes and preferences.
So who do you trust more for your toast
spread, a cow or a chemist?
Why is such a high percentage of the
population clinically obese and suffering
from Type-2 diabetes in Mexico and the
U.S.?
The answers, according to most experts,
can be found in the fierce competition of
multinationals for “stomach-share” of the
consumers. This is something that has been
going on for the last 35 years.
By design, processed food makers,
particularly in the “junk-food” segment,
try to optimize their products for addiction
MEXICONOW
NOVEMBER - DECEMBER 2015
In 2013, Mexico was declared the
world’s leading country in terms of
obesity among children and adults. The
consequences are very severe including the
need to spend 7% of the total health budget
to treat obesity problems, not to mention
the contribution of obese conditions to
health fatalities.
Grains, seeds,
oils and fats
So how do we fix this? Mexico’s federal
government new tax on sweet drinks and
foods of about 8% was only marginally
effective in curbing consumption of
sweets, but it did bring in millions in taxes
for the treasury.
Accumulated FDI
2004-2014:
US$ 16,393 million
Probably better results have been
obtained by the government’s eating
educational campaigns and new food
nutrition laws that target school children’s
diet.
6%
It is not surprising then that most
of the processing of food takes place in
the southern states of Mexico (State of
Mexico, Oaxaca, Puebla, Jalisco and
Veracruz) where the most ingredients are
available and where population has the
highest density.
36
Baking products
1.3% and tortillas
9.3%
Others
EXHIBIT 5
2.15%
about 35% of the % Daily Value for both
sugars and saturated fat.
Source: Ministry of the Economy
with sugar, salt and fat; they are always
looking to hook the consumer with
inexpensive and filling foods.
And countries like Mexico with a
population of limited disposable income
are easy prey. It’s not uncommon to
see a construction worker having a real
(sweetened) large coke and a white bread
“salchicha torta” for lunch or a kid at
school savoring his meal out of a Beef
Taco Lunchable plastic container with a
sweet soft drink, both lunches covering
And there’s a tiny light of hope
developing. Somehow, maybe aided by
social media, a wellbeing trend, or just
plain common sense, there is a flow of
information that is increasing the interest in
healthy foods in Mexico, as well as organic
foods and more natural ingredients.
There are no statistics to back this up,
but retailers talk about increases in sales
of plain carrot snacks, natural calorie-free
sweeteners, olive oil, organic eggs and
fruits and many other healthy options.
FOOD INDUSTRY
Food Processing
Plants 2015
Coahuila
Baja California
Colima
R
R
Zacatecas
Sinaloa
Sonora
R
Jalisco
R
Tlaxcala
Hidalgo
R
Michoacan
State of Mexico
Guanajuato
R
R
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Nuevo Leon
Chihuahua
Durango
Oaxaca
R
R
Tamaulipas
Veracruz
Campeche
Puebla
Chiapas
R
Aguascalientes
R
Quintana Roo
Morelos
Yucatan
Mexico City
R
Queretaro
Tabasco
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FOOD INDUSTRY
Main Distribution Channels
Processed Food Industry in Mexico (% Share)
Goverment
3.1%
Export
Maquila 1.3%
of house brands
Direct distribution
to retailers
Others
1.7%
10.5%
33.5%
7.5%
Wholesalers/
Distributors
42.4%
EXHIBIT 6
Supermarkets
But the race for healthy nutrition
cannot be won without the help of
multinationals, some of which have
launched programs to promote the
consumption of more healthful meals
and beverages, and many have actually
reduced the content of salt, sugar and fat
in their products.
It is not easy, and it is probably
impossible to unwind the addictive
engineering of foods that multinationals
have developed for decades.
Mexicans need a lot of things, but
they certainly do not need a coke.
Debit or credit?
As depicted in Exhibit #6 processed
products outlets in Mexico are
dominated by supermarkets with a
42.4% market share and wholesalers
& distributors with a 33.5% share.
The latter serve among others, small
retailers and the hotel, restaurant and
institution (HRI) foodservice industry.
Walmart leads the retail sector
with close to 2,200 stores, followed
by Soriana with 885 and Comercial
Mexicana with 200. They dominate
the market basically through price
competitiveness.
There are about ten regional
supermarket chains in Mexico including
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Source: CANAINCA
Casa Ley, S-mart and Mz; it is a
relatively small number compared to
the U.S. where there are almost 300.
The regional chains compete with fresh
and natural products, premium brands
and regional goods.
Price clubs such as Sam’s and
Costco carry a good variety of imported
processed food products and compete
with price but sell relatively larger lots.
In the convenience store category,
Oxxo of Femsa (The second largest
Coca-Cola bottler in the world) leads
with 11,000 establishments and a niche
market share of 77%.
If you notice a quasi-monopolistic
pattern in this description you are right.
And the same goes for the supply side
of processed food.
Indeed, the consolidation of
the supply and distribution links
of the processed food value chain
is a phenomenon that is slowly but
surely squeezing mid and small size
operators at the retail end as we as at
the processing side.
This development will ultimately
affect the consumers in price and
quality.
Mexico needs to diversify the
processed food value chain. One
initiative would be the formation of
“Purchasing cooperatives” or “Co-ops”,
as they exist in the U.S. They act as
marketing and production catalyzers
for the small and mid-size producers
and retailers, by providing negotiating
power as a group with larger volumes
while helping spread costs and risks of
the transactions.
Marketing cooperatives are found in
every region of the United States and
handle most types of farm products.
The importance of these cooperatives
to particular commodity sectors varies.
Cooperatives account for 86% of total
farm value of all milk marketed in the
United States; 40% of the grains and
oilseeds; and 20% of the farm value of
all fruits and vegetables.
There are also Co-ops for retailers
that provide purchasing leverage for
the smaller operators and also serve
important functions such as quality
assurance and certification of produce
and food products.
Another tool to strengthen the
small and medium producers and
retailers is to ease import requirements
which currently have absurd red-tape
constraints. Please see the related
article on this subject in this issue.
Agile imports would provide an
element of competition and price
checking against dominant producers
and retailers to level the field for small
and mid-size operators, ultimately
benefiting the consumers.
The frozen enchilada
In Mexico, unlike the auto,
electronics and aerospace industries
which are largely export oriented, the
processed food industry is focused on
the domestic market.
Nevertheless, and although exports
accounted for less than 6% of the total
processed food output, it is by no means
a negligible amount.
As shown in Exhibit #7, in 2014
Mexico exported US$8.26 billion of
processed foods, of which almost 70%
was shipped to the U.S. making Mexico
the second largest supplier of processed
food to its northern neighbor; and from
whom, Mexico got the most part of its
US$10.1 billion imports.
FOOD INDUSTRY
Mexico´s Processed Food Industry Trade Balance
2007-2014 (US$ Billion)
Exports-L
Imports-L
Trade
Balance-R
$2.0
$0
8.261
10.128
8.443
9.710
8.043
9.492
8.099
9.280
6.108
7.699
5.143
7.478
4.312
$6.0
$4.0
8.091
$8.0
5.390
6.535
$10.0
$2.0
0
$-2.0
$-4.0
2007
2008
2009
2010
EXHIBIT 7
2011
2012
2013
2014
Source: Global Trade Atlas
Mexico’s main exports include cane
sugar, baked goods, chocolate and
confectionary.
Although imports have been on the rise
in the last few years, there are important
barriers to entry Mexico’s processed
food market for foreign made goods. For
example, domestic processors are often
more aware of evolving market trends and
are quicker to adjust to demand. Mexicans
are also very brand loyal to domestic
producers, making it difficult for new
comers to gain market share.
And even if U.S. food products are
regarded as high-quality, Mexicans tend to
base their purchase decisions on quantity
more than quality.
And moreover, as of late, the
strengthening of the dollar versus the peso
has significantly discouraged imports,
which will drop at least 10% in 2015 from
2014.
countries with similar taste preferences as
Mexicans, and a few million Americans
who like Mexican food then you are
talking about a huge market, close to 100
million individuals. If this seems like an
exaggeration, go ask Chipotle and Taco
Bell.
There is a HUGE, IMMENSE market
potential for Mexican made processed
foods in the U.S.
And of course, we have the usual
trading ingredients in Mexico’s exports
competitive recipe such as low-cost
manufacturing, free trade agreements,
logistics and many other spicy etcetera’s
for a fantastic successful dish.
Please see Exhibit #8 with KPMG‘s
opinion on the index cost for manufacturing
processed food in selected countries
showing Mexico’s lead.
Yes, Mexico has made a great job in
attracting FDI to supply the domestic
market, but it has not made a good job in
developing a much stronger processed food
exporting base.
It could be a powerhouse that would
easily triple processed food exports in
less than a decade. Let’s fill in the U.S.
supermarkets’ frozen food sections with
enchiladas!
And toasted grasshoppers.
Sergio L. Ornelas
has 40 years of
experience in international trade and foreign
direct investment. He has business degrees
from Babson College, Southern Methodist
University and Harvard. He was Head of
the State of Chihuahua Industrial Promotion
Agency in 1980-85 and General Director for
Intermex Industrial Parks trough 2000. He is
MEXICONOW’s editor.
He may be contacted at:
[email protected]
Cost Index of the Processed Food Industry
Selected Countries, 2014 (%)
-9.1 -5.1 -3.7
-3
-1
-0.7
0
0.2
0.7
1.3
But going south to north is a completely
different story. Mexico has a great
opportunity to significantly increase
exports to the U.S. as not only the exchange
rate is extremely favorable but the Mexican
ancestry population north of the border is
34 million strong and has reached almost
11% of the total in the U.S.
And if you add another 20 million
Hispanics in the U.S. from other Latin
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Source: KPMG
EXHIBIT 8
FOOD INDUSTRY
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