Fomento Económico Mexicano Q1 2025 Earnings Report

Fomento Económico Mexicano EPS Results

• Actual EPS: $0.45
• Consensus EPS: $0.52
• Beat/Miss: Missed by -$0.07
• One Year Ago EPS: N/A

Fomento Económico Mexicano Revenue Results

• Actual Revenue: $9.65 billion
• Expected Revenue: $194.75 billion
• Beat/Miss: Missed by -$185.10 billion
• YoY Revenue Growth: N/A

Fomento Económico Mexicano Announcement Details

• Quarter: Q1 2025
• Date: 4/28/2025
• Time: Before Market Opens
• Conference Call Date: Monday, April 28, 2025
• Conference Call Time: 10:00AM ET

Fomento Económico Mexicano (NYSE:FMX), through its subsidiaries, operates as a bottler of Coca-Cola trademark beverages. The company produces, markets, and distributes Coca-Cola trademark beverages in Mexico, Guatemala, Nicaragua, Costa Rica, Panama, Colombia, Venezuela, Brazil, Argentina, and Uruguay. It also operates small-box retail chain stores in Mexico, Colombia, Peru, Chile, and Brazil under the OXXO name; retail service stations for fuels, motor oils, lubricants, and car care products under the OXXO GAS name in Mexico; and drugstores in Chile, Colombia, Ecuador, and Mexico under the Cruz Verde, Fybeca, SanaSana, YZA, La Moderna, and Farmacon names. In addition, the company is involved in the production and distribution of collers, commercial refrigeration equipment, plastic boxes, food processing, and preservation and weighing equipment; and provision of logistic transportation, distribution and maintenance, point-of-sale refrigeration, and plastics solutions, as well as distribution platform for cleaning products and consumables. Further, it operates small-box retail and food convenience chain stores in Switzerland, Germany, Austria, Luxembourg, and the Netherlands under the k kiosk, Brezelkönig, BackWerk, Ditsch, Press & Books, avec, Caffè Spettacolo, and ok.) names, as well as pretzels under the Ditsch name. The company was founded in 1890 and is based in Monterrey, Mexico.

Fomento Económico Mexicano Q1 2025 Earnings Call Transcript

Presentation

[Operator]

Welcome to the FEMSA's First Quarter twenty twenty five Results Conference Call. My name is Alan and I'll be your coordinator for today's event. Please note this call is being recorded. And for the duration, your lines will be on listen only. However, you will have the opportunity to ask questions at the end.

[Operator]

I will now hand you over to your host Juan Fonseca to begin first. Thank you.

[Juan Fonseca, Director - IR at Fomento Económico Mexicano]

Thank you. Good morning, everyone. Welcome to FEMSA's first quarter twenty twenty five results conference call. Today, are joined by Jose Antonio Fernandez Garza Alaguera, CEO of our Proximity and Health division Martin Arias, our CFO and Jorge Collazo, who heads Cofetola FEMSA's Investor Relations team. The plan for today is for Jose to open the conversation with some comments on the performance of the business during the first quarter, particularly at Proximity Americas and then to provide a quick update on our portfolio.

[Juan Fonseca, Director - IR at Fomento Económico Mexicano]

After Jose's remarks, Martin will provide more detail on our quarterly results. And finally, we will open the call for your questions. Jose, please go ahead.

[José Carbajal, Executive Chairman & CEO at Fomento Económico Mexicano]

Thank you, Juan. Good morning, everyone. During the first quarter, PEMSA was able to navigate a challenging environment across several markets, particularly in Mexico, taking advantage of its resilient geographically diversified business platform. Within Proximity and Health, however, Mexico is by far the biggest component and the division results will inevitably reflect whatever is happening in these core markets. Our results for the first quarter reflect a challenging set of headwinds, particularly in Proximity Americas.

[José Carbajal, Executive Chairman & CEO at Fomento Económico Mexicano]

Combining a persistently soft consumer environment in Mexico with a tough calendar setup and against a demanding comparison base. Therefore, I would like for my remarks today to provide you with three things. First, our assessment of the causes of the underwhelming numbers, particularly related to same store traffic in OXXO Mexico. Second, an overview of some of the actions we're taking to offset or mitigate the impact in Mexico and finally, our expectations for the remainder of the year including what we foresee will be a better second half in Mexico that should help us deliver a solid full year result despite a slow start. After that, we will give you an update on the rest of the operations.

[José Carbajal, Executive Chairman & CEO at Fomento Económico Mexicano]

During the first quarter, same store sales for Proximity America contracted by 1.8% with average ticket growing 5.1% slightly ahead of inflation, but average traffic contracting 6.6% continuing a trend that has been in place for several quarters. The calendar effects are straightforward. We had one day left in February and the entire Holy Week shifted to the second quarter this year. Adjusting for those differences, we estimate that same store sales would have been flat. Beyond that, there is an undeniable weakness in the consumer environment that first manifested itself around the middle of last year just after the election and consistent with previous electoral years.

[José Carbajal, Executive Chairman & CEO at Fomento Económico Mexicano]

Moreover, the ongoing uncertainty around trade with The U. S. Has exacerbated what we already expected would be a slow start to the year due to the postponement of many investment decisions until greater clarity is achieved. Other negative traffic drivers include a particularly colder month of January impacting high traffic categories such as alcoholic and non alcoholic beverages, cigarettes and snacks as well as certain localized markets where consumers have reduced their movement outside the home after certain hours as a response to a heightened perception of risk. Finally, in terms of channel dynamics, we continue to see the traditional trade gradually recover some of the market share it lost to modern channels during the COVID pandemic.

[José Carbajal, Executive Chairman & CEO at Fomento Económico Mexicano]

Historically, the traditional trade has done better in economic slowdowns as people cut down on impulse buys and seek smaller price point SKUs of this channel. As a result of the consumer environment and consistent with what we have seen in similar downturns in the past, some of the CPG suppliers are adjusting their package strategy accordingly. For example, increasing the availability of smaller price point multi serve and returnable presentations that are also well suited for the traditional trade. However, we do not have any clear evidence that other channels may be gaining competitiveness relative to OXXO and our reading to date is that the majority of the slowdown is attributable to factors outside of our control such as the macro environment, weather and calendar effects and consistent with untapped figures for other channels. And this is a good segue to move on and discuss some of the actions we're taking.

[José Carbajal, Executive Chairman & CEO at Fomento Económico Mexicano]

We have launched several commercial and cost initiatives with three clear objectives: one, to drive traffic and top line two, to maintain our positive trajectory of gross margin expansion and three, cost containment initiatives to ensure the leanest organization possible, while not mortgaging our future by cutting transformational initiatives. Within the top line initiative, we should highlight our push for increased affordability across categories, working in tandem with our key supplier partners. These initiatives aim to expand our assortment to include more affordable brands and presentations, including in key categories like tobacco, soft drinks, beer, spirits and healthy snacks. We have launched targeted plans to reactivate the Andasi coffee offering and to support the beer and soft drink categories, including returnable multi serves. Furthermore, we continue to increase the breadth of our financial services and correspondent partnerships with banks and fintechs, while also increasingly leveraging the insights from our SPIN Premier loyalty program to improve the effectiveness of our promotions.

[José Carbajal, Executive Chairman & CEO at Fomento Económico Mexicano]

And this connects with our efforts to drive profitability at the gross margin level. As we keep working with our supply partners to find incremental value through the precise execution of more targeted promotions. On this front, as you saw in our results, a bright spot at Proximity Americas was once again the continued margin expansion at the gross level. As we look at the pipeline of commercial collaborations we see in the months ahead, we are optimistic that we can continue to drive these metrics higher. There are several important negotiations underway in key categories that we expect to provide us with continued tailwind at the gross margin level.

[José Carbajal, Executive Chairman & CEO at Fomento Económico Mexicano]

Further down the income statement, we again faced pressure from another low double digit increase in the minimum wage as well as a loss of operating leverage from the soft traffic trends and the incorporation of the results from the lower margin DK operation in The U. S. We also maintained our pace of store base expansion and capability building activities. In an effort to offset rising expenses, we have made great strides reducing the FTE or full time equivalent per store, generating real efficiencies at scale as well as a reduction in overhead. Despite these efforts, we saw a swing from an expansion of 120 basis points at the gross level to a contraction of similar magnitude at the operating level.

[José Carbajal, Executive Chairman & CEO at Fomento Económico Mexicano]

I have asked all of our operations to drill into overhead expenses where I think opportunities to be a leaner and more effective organization. And that brings me to the general outlook for the remainder of the year. Based on our projections, we believe we will see a sequential improvement in top line dynamics beginning in the second quarter and peaking for the year during the third quarter. Such improvement is partly within our control during the implementation of all the commercial and cost control initiatives I just described and partly outside of our control requiring economic activity and consumer sentiment in Mexico to gradually pick up. Therefore, as a slow start, our base base expectation for the full year remains for a high single digit increase in revenues with stable operating margins relative to 2024.

[José Carbajal, Executive Chairman & CEO at Fomento Económico Mexicano]

Moving on, let me give you a brief update on some of our other formats and markets that we know are top of mind for investors. In The U. S, we continue our testing and experimentation as we advance in the definition of our optimal value proposition for these markets. As you may remember from our last call, we have already started the first conversions of some of the DK stores into OXXO. Back in February, we announced the first one.

[José Carbajal, Executive Chairman & CEO at Fomento Económico Mexicano]

And since then we have reached 15 OXXO units all of them in the Midland Odessa metro area in West Texas. While consumer reaction to the rebranding has been very positive, there is a lot of work to be done as we close the value proposition gap including in the key prepared food category. On that front, we have already made progress bringing the Andante coffee offering from our Mexico operations and we are testing improved food offerings in approximately 20% of the store base. The Also Mexico team is also sharing with the U. S.

[José Carbajal, Executive Chairman & CEO at Fomento Económico Mexicano]

Team some of its expert capabilities such as pricing, assortment and segmentation and there is more to come. Again, very early days and we will keep you posted on our progress there. In Brazil, we continue to make progress reducing shrinkage and employee turnover, which have been two areas of operational focus in recent quarters. We continue to see the brand and value proposition grow in consumer preference and our expansion plans for this year are unchanged with approximately 100 new OXXO in the state of Sao Paulo. At Vara, we had a good start to the year in terms of store base expansion adding roughly twice as many stores during the quarter compared to last year and on track to add approximately two thirty five net new stores in 2025.

[José Carbajal, Executive Chairman & CEO at Fomento Económico Mexicano]

We recently opened a new distribution center in Queretaro and we're making progress as we set up our second region in Northern Mexico, while also advancing as we develop and grow the supplier network for our key private label. In Europe, Valora's results showed solid growth in Mexican pesos given the meaningful weakening of the peso against European currencies year on year. But on a comparable basis, the numbers are sluggish. We see positive trends in retail supported by certain categories like tobacco and from a growing commercial income platform. However, B2B service is lapping a very difficult comparison base from the successful one time Cresco project we executed last year.

[José Carbajal, Executive Chairman & CEO at Fomento Económico Mexicano]

Continue to work to improve traffic to B2C foodservice, which is somewhat dependent on German economic growth. And on the retail front in the coming months, we expect to rebrand a meaningful number of our DV stores in German train stations to our successful Abek banner, which over time should help us in our organic growth efforts as the Abek brand becomes better known in Germany. At Oxogast, we did well in the first quarter, but in the coming quarters we will be increasing headwinds from the voluntary price commitments we have put in place for regular unleaded gasoline together with the rest of the industry in Mexico. And finally, at Cemsa Health, we saw improving operational trends across most markets except Mexico helped by the positive impact of FX as was the case in Europe. The brightest spot continues to be our retail operation in Colombia, but results out of Chile and Ecuador were also solid.

[José Carbajal, Executive Chairman & CEO at Fomento Económico Mexicano]

For its part Mexico is in full operational turnaround mode including a meaningful retighting as we rationalize the store base and continue to fine tune the valuation of our two format strategy. Expect further news on this front as the new management team completes its work of getting up to speed and fine tuning the new strategy. Wrapping up, we would like to leave you with a message that even though the start of the year was low in the core Proximity Americas business, based on the information we have today, our expectation remains that the numbers will improve as we go through the year positioning us well to deliver another solid set of results for the full year of 2025. And with that, I will now turn the call over to Martin to discuss FEMSA first quarter results. Martin, please go ahead.

[Martín Yániz, CFO at Fomento Económico Mexicano]

Thank you, Wilson. Good morning, everyone, and thank

[Martín Yániz, CFO at Fomento Económico Mexicano]

you for joining us today. As you have seen in our press release, we've added a column to the various income statements representing comparable figures to help you isolate the effects of currency fluctuations as well as acquisitions. We are using the same definitions and following the same methodology used for many years by Coca Cola FEMSA in their own disclosure, which will surely be familiar to many of you. Hopefully, you will find this information useful. Let me begin with Census' consolidated financial and operational results for the first quarter of twenty twenty five.

[Martín Yániz, CFO at Fomento Económico Mexicano]

Total revenues increased 11.1%, while operating income grew 4.9% year over year, reflecting mixed results from our business units as several of them faced a challenged macroeconomic backdrop and softer consumer demand in our key Mexican market as well as an unfavorable calendar effect throughout our businesses. On a comparable basis, total revenues and operating income grew by 5.61.7% respectively, evidencing the currency tailwinds, which helped us this quarter. Net consolidated income increased 54.3% to ARS 8,900,000,000.0, mainly driven by: one, a $630,000,000 increase in income from operations two, a CLP 3,000,000,000 increase in the other financial income related to net foreign exchange gains and gains in our financial instruments, mainly as a result of an increase in the price of our remaining Hanigan shares and 3, a billion increase in net income from discontinued operations, driven by a gain from the sale of PTM. All of this despite interest expense higher interest expense and income taxes as we have explained in our earnings release. Moving to the operations.

[Martín Yániz, CFO at Fomento Económico Mexicano]

I will try to be brief so as not to repeat most of what Jose already touched on. Proximity Americas delivered a 6.8% or 1.4% on a comparable basis, increase in total revenues and 1111.8% decline 11% on a comparable basis to income from operations. The decline in operating income reflects soft top line growth accompanied with a solid gross margin expansion. However, offset by higher operating expenses resulting from increased labor costs, continued investment in transformational initiatives and reduced operating leverage. As Jose mentioned, we are implementing a series of top line growth and cost containment initiatives, which we expect to bear fruit in the second half of the year, ideally, combined with the reactivation of the Mexican economy.

[Martín Yániz, CFO at Fomento Económico Mexicano]

On the expansion front, OXXO Magnico opened three sixty one net new stores during the first quarter, a good start to the year, while net additions reached 31 in Colombia and 21 in Brazil through our Grupo Nos joint venture. Now turning to Proximity Europe. Revenues increased 18% in peso terms or 1% on a comparable basis. Gross profits rose 14.8% in pesos, but declined 1.9% on a currency neutral basis, resulting in a margin contraction of 110 basis points, primarily due to softer performance in the higher margin B2B Foodservice segment and flat results in the other businesses. At the operating level, Balora reported a 14.6% decrease in income from operations or 27.7% on a comparable basis, reflecting a 90 a 90 basis point margin contraction, reflecting the impact of the weaker higher margin B2B performance against very demanding comparison base.

[Martín Yániz, CFO at Fomento Económico Mexicano]

The Health division delivered revenue growth of 21% in pesos or 7% on a comparable basis. Colombia had a stellar performance, while Ecuador and Chile had solid results driving the division's momentum for the quarter. In contrast, Mexico remained challenging, but we have begun the process of closing underperforming stores, which we expect to total in excess of four by the end of the year. Operating income rose 27.4% or 11.7% on a comparable basis, with the margin expanding by 20 basis points to 3.5%, particularly reflecting the solid growth in the retail segment in Colombia and solid performance from Chile and Ecuador. Shifting to SPIN.

[Martín Yániz, CFO at Fomento Económico Mexicano]

We are executing against our vision to build an omnichannel ecosystem anchored in customer engagement, loyalty, data driven innovation and financial services. Spin by OXO continues to gain traction with our active user base showing double digit growth year over year to 8,900,000 active users. We are also seeing increased monetization through a higher number The Slim Prema loyalty program is expanding its relevance, now linked to 42.5 of OXXO Mexico sales and becoming an important lever for engagement reaching 25,200,000 active users, an increase of 16.1% compared to last year. As we continue to grow, our focus is shifting towards improving unit economics using advanced analytics to refine our offering and drive incremental value across the system. Lastly, Coca Cola FEMSA delivered another solid quarter, underscoring the strength of its diversified portfolio, geographic footprint and disciplined operating model.

[Martín Yániz, CFO at Fomento Económico Mexicano]

Despite soft volume trends in Mexico, this was largely offset by growth in Brazil and certain other markets. Top line grew by 10% or 5.9% on a comparable basis, supported by revenue growth management initiatives, while income from operations grew at a slightly slower pace of 7.4% or 3.2% on a comparable basis, reflecting mostly higher distribution expenses. The team remains focused on protecting profitability through ongoing efficiency initiatives and by leveraging its proven execution capabilities. As always, we invite you to refer to Coca Cola FEMSA's earnings call webcast for further details. Before closing, let me briefly update you on our capital allocation strategy.

[Martín Yániz, CFO at Fomento Económico Mexicano]

As we announced last February, we remain fully committed to balancing disciplined reinvestment in our core businesses, while maximizing returns to shareholders as we advance towards our target leverage. During the first quarter, we deployed 8,800,000,000.0 in CapEx, representing approximately 4.5% of total revenues with a continued focus on expanding our retail footprint and strengthening our supply chain infrastructure. Regarding the return of capital to shareholders, in the first quarter, we repurchased approximately Ps. 1,300,000,000.0 of FEMSA BG units in the local market. We also paid in January the last installment of last year's declared ordinary and extraordinary dividends for a total amount of ARS6.1 billion or nearly $300,000,000 Additionally, last Friday, we distributed the first quarterly installment of both the ordinary and extraordinary dividends for 2025 for a total amount of nearly ARS 12,000,000,000 or approximately $610,000,000 at current exchange rates as approved by our recent Annual Shareholders' Meeting.

[Martín Yániz, CFO at Fomento Económico Mexicano]

The total amount allocated for shareholder returns from 03/24/2024 to March 2025, including both extraordinary and extraordinary distribution amounts is 44,800,000,000.0 or around 2,500,000,000 For the period from March 2025 to March 2026, we have committed to returning Ps. 66,000,000,000 or nearly Ps. 3,200,000,000.0 at current exchange rates. Looking ahead, we remain optimistic about the opportunities ahead. And while we acknowledge that this year represents somewhat of an uphill battle, the first quarter usually is our least important quarter.

[Martín Yániz, CFO at Fomento Económico Mexicano]

As the macroeconomic and competitive environment continues to evolve, we are confident in our strategy, our team and the resilience of our diversified portfolio and trust our results will revert back to their long term growth trajectory as they have always done. As we move forward, our focus will remain on disciplined execution to deliver solid results for the rest of the year and beyond. And with that, we will now open the call for questions. Operator, please go ahead.

[José Carbajal, Executive Chairman & CEO at Fomento Económico Mexicano]

Thank

[Operator]

We will take our first question from Thiago Brotolucci, Goldman Sachs. Your line is open. Please go ahead.

[Thiago Bortoluci, Equity Research Vice President at Goldman Sachs]

Yes. Hi, good morning everyone. Jose, Martin, Juan, thank you very much for the call and the opportunity of talking to you guys. Always a pleasure. I would like to explore a little bit more the momentum for ProSim in The Americas particularly Mexico, right?

[Thiago Bortoluci, Equity Research Vice President at Goldman Sachs]

Jose, the initial remarks that you shared were super helpful, but double clicking into those. I think the first point I would love to hear from you is what's your feeling regarding traffic share, right? You alluded to NTAD, but obviously we can't imply necessarily how much traffic has moved there. But I think it's fair to assume OXXO has apparently lost some traffic share in the quarter, right? So just to understand if this is your reading and if you have a clear view on to who you are losing this what are efforts to adjust?

[Thiago Bortoluci, Equity Research Vice President at Goldman Sachs]

This is number one. The number two, you mentioned this being the fourth quarter in a row that you are declining traffic, Does this trend change at all your appetite for further growth or the projections for the returns on pet of these new stores that you're opening in the region? And then finally, the third point within this proximity debate, mix has been an important source of compensation at the gross margin, Could you please give us a ballpark how your mix has evolved over the last two years? More curious to see how much financial services and commercial income penetration you have there and potentially to where you believe this could get over the next two years? Those are the questions.

[Thiago Bortoluci, Equity Research Vice President at Goldman Sachs]

Thank you very much.

[José Carbajal, Executive Chairman & CEO at Fomento Económico Mexicano]

Thiago, thank you very much. Very important question and a lot of color to address on these things. So I would say first on the traffic issue, the biggest impact that we see are the calendar effects particularly obviously the loss of the Holy Week or the shift of the Holy Week to the second quarter, a very cold weather in the North Of Mexico in January and the broader economic. So those are what we think are the biggest drivers of traffic slowdown.

[José Carbajal, Executive Chairman & CEO at Fomento Económico Mexicano]

And we see it because we saw how in January we were grading in hot beverages and we were very soft on cold beverages. And I mean, it's very particular to what happens in when we have a colder than expected January. If you look at share, we've been monitoring closely our Nielsen measurements of share. And we what we call the modern trade or the convenience modern trade or the OXXO channel, we lose marginal market share, but on the low single percentage of single digits. So it's very granular.

[José Carbajal, Executive Chairman & CEO at Fomento Económico Mexicano]

But we do see a gain in share from the traditional trade. And then if you look at the six regions that Nielsen measures, 80% of our market loss decline is in the Pacific Region, which is a region that includes all the way to Tijuana to Nayarit going through Sinaloa and the Northeast Region, which includes all the way from Chihuahua to Tamaulifa. So basically the North Of Mexico is 80% of our share loss. And those are regions that where other channels like the hard discount channels are not really present. So it's really the traditional trade that took a gain.

[José Carbajal, Executive Chairman & CEO at Fomento Económico Mexicano]

And we see a much bigger share loss from the modern trade non convenience and the modern trade out of Servicio losing much more share than us. So that's where I think

[Martín Yániz, CFO at Fomento Económico Mexicano]

I think recovering some of what they lost.

[José Carbajal, Executive Chairman & CEO at Fomento Económico Mexicano]

Yeah. Some of and that's where we see the biggest share. So I'm not too concerned about other channels gaining or not. And then if you look at categories where we're losing share and the traditional trade is gaining share, the biggest driver is tobacco. And that is obviously a concern for me because I do see a shift towards tobacco on a per single deployment.

[José Carbajal, Executive Chairman & CEO at Fomento Económico Mexicano]

We are not allowed to do that in OXXO, but the traditional trade can sell on a per cigarette basis. And also lower priced tobacco products even some tobacco products that are without all its proper customs paid in. So that is something I'm concerned with. We are working with our suppliers to launch some value brands in tobacco. And what we're impressed, we've already launched a brand with our help of one of our big tobacco players.

[José Carbajal, Executive Chairman & CEO at Fomento Económico Mexicano]

And we did see a huge increase in traffic and not a lot of shift from higher value brands to the value brands. We're just getting incremental traffic from people that are all already into the value brands of tobacco. So I'm not too concerned about traffic from other channels. That doesn't mean we're not doing the best we can to increase traffic in value or affordability presentations. And I do think there's a huge opportunity for OXXO to execute even better The beer value brand categories in soft drinks go back to affordability and returnability packages.

[José Carbajal, Executive Chairman & CEO at Fomento Económico Mexicano]

We have a huge campaign with our beer suppliers to drive growth there. So I'm positive that we're going to be able to drive growth. In the store expansion front, I'm still seeing huge opportunities for us to grow. And so that's why we're not very aggressive on declining the number of store expansions. We're very aggressive on measuring the quality of the stores we're opening.

[José Carbajal, Executive Chairman & CEO at Fomento Económico Mexicano]

We're really prioritizing quality over hitting a number per region. We see obviously, there's going to be some cannibalization as we continue to grow. But it's still very profitable return on invested numbers and we still see a huge opportunity for us to expand. So I'm not seeing a decline yet, but much more discipline and incentivizing the regions towards quality of the stores we're opening. And finally, I would say financial services is a category that's still growing.

[José Carbajal, Executive Chairman & CEO at Fomento Económico Mexicano]

It's growing mid single digits. It's helping us. We're growing with all these fintech initiatives with a lot of alternative payments. Some of these e commerce sites people are really using Oksupay to do their payments and we're growing a lot there. And we are growing a lot in the using OXXO as an ATM machine basically going with your debit card or with your fintech credit card and going for cash.

[José Carbajal, Executive Chairman & CEO at Fomento Económico Mexicano]

That's a big growth segment and we still see that as a huge growth opportunity and it's going to keep growing as we increase the number of players that we let into the OXXO pay network. I would also say obviously the OXXO income or retail media things have it's just getting started and has huge opportunity to keep growing. We are seeing a lot of excitement from our player from our key suppliers to use the SPIEN PREMIA information to expand. And we see a huge opportunity still for gross margin expansion from retail media, from services and from promotional income that we still see a lot of opportunities.

[Martín Yániz, CFO at Fomento Económico Mexicano]

Yes. I think I would add Thiago to what Jorge just said. I mean, the way you framed the question about mix, certainly financial services and commercial income, I mean, I'm surprised myself at how quarter after quarter, year after year, we continue to talk about these two drivers. And then, of course, you look at where the gross margin is and kind of in the mid-40s and in some fourth quarter of last year, we almost approached 50%. So it's been completely incremental to we've added the number of SKUs.

[Martín Yániz, CFO at Fomento Económico Mexicano]

We strengthened and enriched the mix of actual merchandise. But there's no question that financial services and commercial income have been doing a lot of heavy lifting in terms of the margin performance. And I think that's fantastic, right? Because to Jose's comment a few moments ago, it looks like certainly on the commercial income front, we think there's a lot more where that came from.

[Thiago Bortoluci, Equity Research Vice President at Goldman Sachs]

This is super helpful. Thank you very much both. Appreciate Thank you, Jeff.

[Operator]

We will take our next question from Banter Arkes. Your line is open. Please go ahead.

[Analyst]

Yes. Good morning and thank you very much for taking my question. I would like to follow-up a little bit just on what like what is within your control, right, within OXXO and you've talked a couple of initiatives. So wanted to get a little bit more detail and granularity as to the initiatives that you're looking at be it in store or be it on the Allied to achieve certain cost savings to really kind of like get maybe a little bit of a leaner structure in place within OXXO in Mexico to help drive that gross margin expansion also further down the line because it feels like a lot of it is lost and even more than is actually lost than what is gained on the gross margin level. So maybe help us understand with a couple of ideas initiatives what you're looking for in order to drive that gross margin expansion throughout the income statement down to the EBITDA?

[Analyst]

Thank you. Just one second please.

[José Carbajal, Executive Chairman & CEO at Fomento Económico Mexicano]

So, yes, Ben. Thank you. So first on the gross margin initiative, I think there's a lot of things that we're doing on financial services that will increase our gross margin. We are still to get authorization to begin again Van Norte. And I think we already have Banco de Pecca, but Van Norte is set to come in as a new banking customer.

[José Carbajal, Executive Chairman & CEO at Fomento Económico Mexicano]

And those are initiatives that will help us drive our gross margins. We see opportunity for segmentation and adjusting the value proposition to increase certain categories that have opportunities for better margins by adjusting the space and the variety and we see an opportunity there. And finally, we're expanding dramatically our retail media platform. Currently, we are promoting over a little bit over 3,000 digital screens throughout our store network and we're more than doubling that throughout the rest of the year and that brings incremental revenue very, very dramatically. We are also very excited about our expansion of our controlled environment stores, what we call the OXXO nichos.

[José Carbajal, Executive Chairman & CEO at Fomento Económico Mexicano]

Those are very profitable stores. They tend to mature very quickly. The investments required to open them are it's much slower much smaller investment than the regular OXXO. And almost we're going to be opening almost about a quarter of our new store network will be OXXO VICHO. So over 300 stores will be that and that will also help us in profitability.

[José Carbajal, Executive Chairman & CEO at Fomento Económico Mexicano]

In terms of the overhead and opportunity without giving you an estimate or a precise number, I would say there is we see we have some transformational initiatives that we're investing heavily on and those weighed on the overhead. And we but they're already bringing a lot of revenue. So we're not going to cut on those. Also things on the foodservice investment, things on retail media, things on the iCash investment, those require a full set of talented teams, a full set of people that are working hard on creating those new avenues that provide us a lot of value down the road. We're not cutting on those.

[José Carbajal, Executive Chairman & CEO at Fomento Económico Mexicano]

But we do see opportunities on other sides of the overhead. Some on the regions by centralizing certain administrative processes that are still scattered around throughout the region. We see an opportunity there. And then on other categories that frankly in some aspects of the OXXO team that the teams have opportunity to become leaner and address them. So I think those are the main issues.

[José Carbajal, Executive Chairman & CEO at Fomento Económico Mexicano]

I would add there are other parts of proximity where I think we were investing heavily on developing teams. And now that the local teams especially in OXXO International are more fully on in place, we can be leaner in the overhead in the central offices. So those are where I would say are the biggest opportunities. I think the number would be significant, but I would fail to give you a precise number as to how much savings will be

[José Carbajal, Executive Chairman & CEO at Fomento Económico Mexicano]

there.

[Martín Yániz, CFO at Fomento Económico Mexicano]

Let me also complement some numbers. If you just drill down to Oxo Mexico and you look at the growth of selling expenses, you can explain all the growth that we had this quarter by inflation and expansion. And despite there being an increase in the minimum wage of 12%, if I'm not mistaken, the reality is through the initiatives that were implemented with regards to staffing and much more dynamic staffing per store and taking into account peak periods, we were able to offset and keep the growth of the sellingances at lower than you would have otherwise expected and very close to the sum of inflation and expansion. I think that's a relevant point Ben, the fact that even though this business is obviously super sensitive to top line and operating leverage is a key part of profitability.

[Martín Yániz, CFO at Fomento Económico Mexicano]

We have chosen to keep opening stores, not only to keep opening stores at the same pace of 1,100, 12 hundred per year against a slightly a slowdown in the top line, but that we again front loaded the openings. If you look at kind of the vis a vis last year, nothing it wasn't quite the same number, but almost. So it's again going to be a year where a lot of the openings take place in the first half, all of which I think factors into the calculation that Martin just addressed in terms of just inflation plus that roughly 5% of the store base being added this year, it accounts for an important part of the expense increase.

[Analyst]

Okay. Thank you.

[Operator]

We will take our next question from Bob Ford, Bank of America. Your line is open. Please go ahead.

[Robert Ford, Analyst at Bank of America]

Hey, thank you so much. How should we think about the monetization of SPIN and SPINRAN? I mean, you alluded generally to some opportunities with Trebia in data. But more specifically, when you look at the financial services opportunity, how are you mapping that out right now to be in the medium term?

[Martín Yániz, CFO at Fomento Económico Mexicano]

Sure. The way the Sprint team thinks about this the financial services, first financial services is quite a broad concept. And obviously, it includes increasingly providing the customer with the ability to execute honest transactions through our app. And that in itself then generates the data and gives you insight into their spending habits. In order to do that and to maximize the effectiveness of the application as a method for payment, we ideally want to take that outside of the store.

[Martín Yániz, CFO at Fomento Económico Mexicano]

And we're running already some tests with our Villafensa in one key city of putting out terminals and allowing the mom and pop stores to actually be able to accept payments. So there are mom and pop stores in the city where people can actually pay their electricity bill for example. And other utilities and other and that platform then becomes a way where people can pay with a QR code. If you manage to create that ecosystem where you become the preferred payment system in Mexico, the optionality there of a series of ancillary businesses around that payment platform are enormous. One distinguishing factor, which our payment platform will have, which other payment platforms in Mexico will not have is the loyalty component of the Points.

[Martín Yániz, CFO at Fomento Económico Mexicano]

And I've actually been in the stores when I've asked the owner of the store, what does the premium point bring to you? And they say, it allows me to be competitive with OXXO believe it or not. It allows me to offer a similar loyalty point that OXXO. So they actually do not associate spin with the actual OXXO store and they see this as a sort of advantage that allows them to be competitive whether relative to their other mom and pops. Once you create that ecosystem of payment platform with this distinguishing feature of loyalty, you then again, you're driving more data, more information, more engagement with the app.

[Martín Yániz, CFO at Fomento Económico Mexicano]

If people are using the app two, three times a day to make all sorts of payments to transfer money, not only amongst themselves locally, but to receive their remittances to do their cash in cash out in the OXXO store with the recycling machines that we're putting in. And then you have the ability to layer in an actual financial products and that includes taking deposits and making loans. As I've mentioned on previous calls, we do expect that over time we're going to upgrade But now basically our fintech license, we will upgrade it into a full banking license, which will provide us with greater flexibility. Obviously, we're at the very, very, very beginning days of that and we will give everybody ample time and guidance as to how that is evolving. There is no need to have any concern over the next few years of us all of a sudden growing our balance sheet dramatically because of a significant amount of lending and so on.

[Martín Yániz, CFO at Fomento Económico Mexicano]

It will be done in a very difficult very slow, very cautious way. So we avoid some of the mistakes that have been made by other retailers in rolling out these types of financial products. So again, the theme and generally the answer to your question is, it's all about the ecosystem. It's not one initiative. It's integrating OXO.

[Martín Yániz, CFO at Fomento Económico Mexicano]

It's going outside of OXO. It's integrating a whole panoply of services and alternatives for the consumer for payment. That ecosystem then creates additional optionality of all sorts of things as people engage ever more with the application. I hope that was helpful.

[Robert Ford, Analyst at Bank of America]

It makes sense. And just as a follow-up, separate question or separate topic and that is Eastside. The same store sales in Mexico were particularly weak. I was wondering if you could just expand on what you're doing across price assortment and service? And what's different this time in terms of how you're changing the way you go to market?

[Robert Ford, Analyst at Bank of America]

I think, Jose said something about going to with two formats, which sounds a little bit more structural, but whatever you could say would be helpful.

[José Carbajal, Executive Chairman & CEO at Fomento Económico Mexicano]

Well, again, I think obviously the numbers are weak, but they're weak particularly on traffic. We had a healthy ticket, but it's much more related to mix than to any price increases or anything. In the profit sense, obviously, a big chunk of that has to do with the weather conditions and the calendar effect, but still are even isolating for those effects the traffic numbers are not where we want them to be and we're not happy at it. We do think there is a shift in economic conditions in Mexico and there is an appetite to go to certain value opportunities in our core categories. I think we should go back to providing value opportunities and affordability and returnable packaging in beer, in soft drinks.

[José Carbajal, Executive Chairman & CEO at Fomento Económico Mexicano]

And we see we're already seeing an increase in traffic in tobacco just by incorporating a few value brands. And we're not seeing a shift from premium smokers to value smokers. It's just an incremental traffic. So I'm confident that the full strategy that we're putting in place towards value and affordability in our core categories, but also in some of our supermarket categories or groceries and stuff will increase our traffic. And then we will compensate on the gross margin front with all of the activities we're doing in promotional income and some of the financial services.

[José Carbajal, Executive Chairman & CEO at Fomento Económico Mexicano]

So that's why I'm very confident that we will turn it around. But yes, there's a lot of things under our control that we need to work hard on to bring to increase the traffic numbers again.

[Martín Yániz, CFO at Fomento Económico Mexicano]

And I would add Bob, this is Juan. I mean, we've seen this in the past, right, where when slowdown kind of presents itself and then the consumer begins to shift from larger purchases, less frequent larger purchases in bigger boxes, they privilege from a cash flow standpoint going more frequently to the store that is close to them. And so there have been several instances in the past where OXXO benefits actually from this change in habit when people say, well, just going to go buy a smaller package that maybe on a per unit per ounce basis is not the most economic way to do it, but it allows me to manage my cash flow better. And then, of course, you bring in this we mentioned how again, this is something that happens every time. The CPGs and, of course, being so close to Coke FEMSA, we know how good they are at this, coming up with more returnables, bigger presentations.

[Martín Yániz, CFO at Fomento Económico Mexicano]

In many ways, the SKUs that are well suited for the mom and pops are obviously SKUs that are well suited for us as well. And you notice how the changes in the mix and this doesn't happen by itself. We obviously work on it that you increase and sometimes you have abandoned returnability because the consumer was not buying returnables anymore and then they start asking for them again and you obviously make sure that you can accommodate that. So I think that's another component of the confidence, which is there's really nothing unique to what we're seeing right now in terms of you look at a twenty year series. We've obviously been in these types of situations before.

[Martín Yániz, CFO at Fomento Económico Mexicano]

And OXXO is usually quite defensive and quite resilient. You start seeing we've talked a little bit about this, things like spirits. The suppliers coming up with a special small 200 ml bottle basically for OXXO, right? And so you work with in these partnerships and it ends up being in some cases, I mean, fairly neutral if not even beneficial in some cases.

[Robert Ford, Analyst at Bank of America]

Okay. Question was about Ita and I should have said FEMSA Health Mexico and I think you misunderstood me, but it was about ITA or FEMSA Health Mexico where the same store sales number was down 11.5%? The FEMSA Health Mexico business, which is down 11.5 on

[Robert Ford, Analyst at Bank of America]

a same store basis.

[José Carbajal, Executive Chairman & CEO at Fomento Económico Mexicano]

I would say FEMSA Health, I'm sorry. Yes. Sorry,

[José Carbajal, Executive Chairman & CEO at Fomento Económico Mexicano]

we didn't get it.

[Martín Yániz, CFO at Fomento Económico Mexicano]

Now we gave you another five minutes of FEMSA sales, which I'm sure everybody appreciates.

[José Carbajal, Executive Chairman & CEO at Fomento Económico Mexicano]

So I would just say Health our Health Mexico operation is on a full turnaround mode. We had a business model that was set up in towards a cost structure that was sustainable when we when before the cost of the labor cost did not rise as dramatically. And when the cost of labor started to expand the first few 20% increases in minimum wage did not hit any of our businesses because we were paying way above that even for lower salaries. But eventually after five years or more of 20% minimum wage increases, it started to hit us. And our health business in Mexico was did not have the enough scale to have a very aggressive price to compete with a value player and had a cost structure that became too onerous.

[José Carbajal, Executive Chairman & CEO at Fomento Económico Mexicano]

And so we are transforming the business model into a more mainstream and premium type of store format that is giving us good results. But some of many of our old legacy stores are just not profitable and we're doing a whole restructuring of that. And the good thing is that we've been able to do that successfully in Chile, in Ecuador and Colombia. We have a very strong business model where we have premium stores. If you go to Ecuador, we have the Pideka store layout, which is a very good premium store layout.

[José Carbajal, Executive Chairman & CEO at Fomento Económico Mexicano]

And we have the Santa Ana, which is our value store format. And both businesses are growing dramatically. We have a similar model in Chile. And in Colombia, we're just growing dramatically with all these changes in the regulatory framework. Colombia has huge opportunity for growth in health.

[José Carbajal, Executive Chairman & CEO at Fomento Económico Mexicano]

So in Mexico, we're rethinking and refounding the whole business model. If you think about it, there are huge opportunities for that business to refound itself on a more omnichannel strategy to think to take advantage of the OXXO platform to deliver some of that OTC and even prescription drugs through the store network. So you will see initiatives of how we found that business model, but it's going to take us a few months even a couple of years to turn that business around.

[Martín Yániz, CFO at Fomento Económico Mexicano]

Yes. I think I remind everyone, I mean, how that operation really came to be in terms of the three very regional acquisitions where we bought three small good brand locally operations and the effort to turn that into a national platform has been an uphill battle. And so it's always been a function of scale, I think. And as Jose was saying, the two banner strategy that has served us well elsewhere is something that obviously we're testing now in Mexico. But really thinking a little bit outside the box in terms of how to compete in an industry where there are two or three big incumbents that we haven't quite been able to catch up to.

[Robert Ford, Analyst at Bank of America]

Thank you so much.

[Operator]

We will take our next question from Ricardo Alves, Morgan Stanley. Your line is open. Please go ahead.

[José Carbajal, Executive Chairman & CEO at Fomento Económico Mexicano]

Hello, everyone.

[Ricardo Alves, Analyst at Morgan Stanley]

Thanks for the call. I hope you can hear me. Thanks for the opportunity as well. I have a couple of follow ups in Mexico also, but then in The U. S.

[Ricardo Alves, Analyst at Morgan Stanley]

And Brazil as well. In Mexico, I think that the color on competition in one of the first questions was really helpful. So thanks for that. But I wanted to explore a little bit more the cannibalization. So competition with yourself, if you will.

[Ricardo Alves, Analyst at Morgan Stanley]

It's been really impressive the pace of growth of your stores. We have been highlighting that for a while. But I wanted to understand specifically from you, why is this major expansion has not been detrimental to your same store sales? I don't know if perhaps you can share some metrics that you use to evaluate each also that you're opening the betting ratios that we've talked in the past, maybe metrics that you use to assess the best spots to open new stores. I think that hearing from you why or where comes your conviction that there hasn't been a lot of cannibalization, it would be very helpful for the growth outlook in terms of new store openings in Mexico.

[Ricardo Alves, Analyst at Morgan Stanley]

In The U. S, very quickly, just a quick update on the expansion as we think about the inorganic side, if there's anything I know you're limited into what you're able to comment. But qualitatively speaking, how you're thinking about the inorganic part of how key the inorganic part will be for your U. S. Expansion?

[Ricardo Alves, Analyst at Morgan Stanley]

And then as it pertains to your organic expansion, I am very curious to hear any updates on the prepared food side. If there is any at this point any updates in terms of targets that you have for prepared foods as a percentage of your total versus what you achieved in other regions like Mexico? And how could that be accretive to your margin? I think that this is the most interesting part of the ramp up that you're doing in The U. S.

[Ricardo Alves, Analyst at Morgan Stanley]

Outside of the conversion into OXXO stores, which you already mentioned. And then my last follow-up would be on the Brazil side. I appreciate the comments about the slower pace of openings in Brazil, which I think I understand. But I think that the pace of growth in terms of top line still surprises to the upside. So let's say if the shrinkage and employee turnover issues that you're facing you resolve them before expected, How realistic would be for us to model Samsung stepping up and speeding up the current growth scenario?

[Ricardo Alves, Analyst at Morgan Stanley]

Is there any bottleneck as it pertains to your partner in Brazil today that would make that impossible to execute or maybe the answer is not? So just assessing the possibility of speeding up Brazil if these operational struggles are resolved. Thanks again.

[José Carbajal, Executive Chairman & CEO at Fomento Económico Mexicano]

No. Thank you. Very good questions. I will start with the last one to be quick and I think we should spend more time on the cannibalization issue. But in Brazil, our we are incredibly happy with the last few months in Brazil, not only on cost controls, turnover and shrinkage, but also on top line.

[José Carbajal, Executive Chairman & CEO at Fomento Económico Mexicano]

We are incredibly happy with the momentum we're seeing. And we want to I mean, just in the last if the year continues like that, we are very happy that it's going to turn out to be a great opportunity for us in Brazil. We need to we like the rate of expansion around 20% to 25% of our base. That was the rate of expansion of OXXO even at its highest number. So I think those are the numbers that you should expect going forward.

[José Carbajal, Executive Chairman & CEO at Fomento Económico Mexicano]

About 20 to 25% of our store base is and I think Brazil certainly continue to grow that for the foreseeable future. So you should see from 100 to 120 to 140 etcetera and eventually get to a level of growth that's similar to Mexico in a decade or so. So we're happy with Brazil and we would continue. And with in terms with our partner, as you know, are in a JV there. We have a great partner there, but we will continue to invest heavily behind our Brazil business.

[José Carbajal, Executive Chairman & CEO at Fomento Económico Mexicano]

And if for any reasons or for any financial complications they do not follow through, would come to an understanding with them. On The U. S, it's too early to talk about the food issue. We're iterating a few formats. We are already launching the Andasis coffee brand and we're seeing incredible results.

[José Carbajal, Executive Chairman & CEO at Fomento Económico Mexicano]

We are going to try some stores with Dona Totta and we have a partnership with a pizza chain that we are very excited to continue growing. It's a great opportunity for us to learn a capital growth we have not developed well in Mexico and I think huge opportunity. And we are trying a few other things in terms of price pools etcetera, but it's too early. We would love to achieve up to 10% of our revenues of in store sales on foodservice, but it's too early to tell yet how that will turn out. We need more months to iterate.

[Martín Yániz, CFO at Fomento Económico Mexicano]

If you allow me, I think in The U. S. Question there was also an issue about organic versus inorganic growth.

[José Carbajal, Executive Chairman & CEO at Fomento Económico Mexicano]

Yes. And I would just add on inorganic, we are obsessively focused on getting the value proposition right. I think the risk exactly the wrong way to do it is try to be M and A driven without the value proposition right. I mean you see what's happening in The U. S.

[José Carbajal, Executive Chairman & CEO at Fomento Económico Mexicano]

You guys follow it probably more than I do. The players that are winning share are the super regionals. These WAWAs, these KACE, these QuickTrips, those are the ones that are and they're not obsessed with the big M and A, they're obsessed with getting the value proposition right and expanding organically. That's

[José Carbajal, Executive Chairman & CEO at Fomento Económico Mexicano]

what

[José Carbajal, Executive Chairman & CEO at Fomento Económico Mexicano]

we want to do. Obviously, we eventually would look for a good M and

[José Carbajal, Executive Chairman & CEO at Fomento Económico Mexicano]

A

[José Carbajal, Executive Chairman & CEO at Fomento Económico Mexicano]

opportunity if it comes in the regions that we think we could be a big consolidator, which is the Southwest and the Southeast. Without California and without Florida, we've been very public on that. But the most important thing is for us to have the right value proposition. We're very happy with what we're seeing in terms of excitement around the OXXO brand in West Texas in Midland and Odessa, but it's too early to claim any type of victory or to expand. But our obsession would be organic growth with certain inorganic opportunities 8%.

[José Carbajal, Executive Chairman & CEO at Fomento Económico Mexicano]

And then I would just on the cannibalization aspect, look I came into also in 2018 and the first project I had to work on was a big cannibalization project because we were concerned it was an electoral year very similar to this one. It was 2018 right after the election. And there were a lot of concerns of traffic declines in the Piedras Negras, in Monclova all these northern cities in Mexico. And they are still our highest return on invested capital. Of we never stopped opening we're still opening stores today.

[José Carbajal, Executive Chairman & CEO at Fomento Económico Mexicano]

And that's where we have our peak a much more density store. There is cannibalization. We measure it. Last year of the 1,200 or more than 1,200 stores that we opened about 600 of them had some type of cannibalization effect around the stores in the vicinity. Having said that, that is within the margin of we feel okay with it.

[José Carbajal, Executive Chairman & CEO at Fomento Económico Mexicano]

The return on investment in capital is still way, way above what that gives us confidence that some level of cannibalization is tolerable. As we move more into also niche and also in control vicinity, we are seeing much less cannibalization and that's a huge opportunity for us to continue growing. We love that format and we will continue to expand it. And I think that will limit a little bit of the cannibalization impact. We are incentivizing our regions and our expansion to focus on stores that limit cannibalization as much as possible and that increase return on invested capital as much as possible.

[José Carbajal, Executive Chairman & CEO at Fomento Económico Mexicano]

So we prioritize quality over quantity. But with that, we still see an opportunity to grow above, I would say, above 1,000 stores per year for the foreseeable future. And I think that will continue for at least several years ahead.

[Martín Yániz, CFO at Fomento Económico Mexicano]

I think there was also embedded in your question a broader question about foodservice in Mexico. And the reality is we have high expectations and high hopes for foodservice in Mexico. When you look at places like The U. S. Where food is 20% to 25% in the leading players of sales and you look at places like Japan, which is over 50% of fresh food, there's definitely an enormous amount of room to grow for FEMSA.

[Martín Yániz, CFO at Fomento Económico Mexicano]

Now Mexico is a different place. It's in a good and a bad way. And the bad way is it has significantly broader informal food offering throughout Mexico. So the taco stand at every corner, the food carts and so on, all those are potential competitors. On the good side, Mexicans have many meal occasions.

[Martín Yániz, CFO at Fomento Económico Mexicano]

They have breakfast. They have the famous mid morning snack. They have lunch. Then they have another mid afternoon snack and then they have dinner. And each one of those eating occasions has a variety of breads, cookies, torofats.

[Martín Yániz, CFO at Fomento Económico Mexicano]

It really is a very wide variety of things. And so there are we believe there's plenty of opportunity here. We definitely have to do better. We don't have a specific target. There is an ongoing debate about in how many of the stores that we have or ultimately we have a food offering.

[Martín Yániz, CFO at Fomento Económico Mexicano]

And there's a general consensus, it's not going to be in all 24,000 stores. In the home occasion or the home segment of stores that are really meant to cover daily repositioning needs probably you won't have food. But definitely you're going to have it in the downtown, high traffic, office related or school related or near a hospital related type stores. So that is still a work in progress and we don't have any clear targets to share with you at the current time.

[José Carbajal, Executive Chairman & CEO at Fomento Económico Mexicano]

I would just add Ricardo that the analytical data that we've been exploring on cannibalization tells us that it's no more than 20 to 30 basis points of same store sales that it affects. We're I mean we wanted to be as near zero as possible. Within that range we are okay. We'll continue to expand given our high ROIC our marginal high ROIC in our stores.

[Ricardo Alves, Analyst at Morgan Stanley]

That was 20 bps to 30 bps, right? Sorry.

[José Carbajal, Executive Chairman & CEO at Fomento Económico Mexicano]

Yes. Bps. Bps.

[Ricardo Alves, Analyst at Morgan Stanley]

Got it. Thank you. Thank you so much everybody. Thanks for answering all the questions and the questions within the questions. Appreciate that.

[Martín Yániz, CFO at Fomento Económico Mexicano]

Yes. No, you guys are doing three questions in one. We're being very generous here, but keep it up to Apologies. Apologies, Juan. No worries.

[Martín Yániz, CFO at Fomento Económico Mexicano]

Thiago started at the very beginning setting the tone. So that's okay.

[Operator]

We will take our next question from Alvaro Garcia, BTG. Your line is open. Please go ahead.

[Alvaro Garcia, Associate Partner at BTG Pactual]

Hi, gentlemen. Thanks for

[José Carbajal, Executive Chairman & CEO at Fomento Económico Mexicano]

Hello, Alvaro.

[Alvaro Garcia, Associate Partner at BTG Pactual]

I was wondering if you could give us more color on OXXO Nietro on what it is exactly and why you think it might have higher ROIC? And then to a follow-up on the pilot in Puebla between spin and Juntos or spin and cough. What are some of the early learnings? And what are the early challenges you're seeing in sort of really firing up that flywheel? Thank you.

[José Carbajal, Executive Chairman & CEO at Fomento Económico Mexicano]

Okay. So on the Oxonitro, I will give you more color. On average, an Oxonitro is imagine we get a call from a factory, a big factory here in Monterrey and they tell us, hey, I have 2,000 workers here and our cafeteria is not enough and they are all they are from out of town. They want to do financial services. Can you go and put one?

[José Carbajal, Executive Chairman & CEO at Fomento Económico Mexicano]

And I actually did one shift in the OXXO in the Kia factory and they have that's a huge and they already have over two OXXO in that Kia in the Korean auto manufacturer there. And the way

[José Carbajal, Executive Chairman & CEO at Fomento Económico Mexicano]

it works is

[José Carbajal, Executive Chairman & CEO at Fomento Económico Mexicano]

usually they are asking for us to come in. So rents tend to be sometimes negative. And then they tend to pay our electricity bills. And so you can imagine and then most of the installation and the cost of the CapEx requirement is already there. So it's very friendly economics.

[José Carbajal, Executive Chairman & CEO at Fomento Económico Mexicano]

They tend to mature very quickly because it's already a controlled environment. People know the store and they love it. I mean, see the workers see it as a benefit. Obviously, there's some SKU control. So that works against it.

[José Carbajal, Executive Chairman & CEO at Fomento Económico Mexicano]

So they tend to sell less. They would usually do not sell alcohol. Some of them do not allow bubble gum or stuff like that. There's some SKU controls. There's some hour shifts.

[José Carbajal, Executive Chairman & CEO at Fomento Económico Mexicano]

But given all even taking all that into consideration they sell less, but their cost their investment cost is much less. And so they tend to create value expansion because people that were usually not getting a snack get an extra snack for the day, get their whatever other products. So that's an OXXO NYCHO and they have been phenomenal for us. And obviously, we have the network effect that most people want to have an OXXO there because it allows them to connect to financial services and send money to their home. So we tend to have a much higher market share OXXO initial concepts than what we have in the street.

[José Carbajal, Executive Chairman & CEO at Fomento Económico Mexicano]

That's and there's more type of OXXO. There's in universities. There's in buildings. There's the OXXO Smart. But I would say on average that's the gist of it.

[Martín Yániz, CFO at Fomento Económico Mexicano]

On your second question with regards to the earnings on Spiti. One, no particular order of priority. The relationship of the mom and pop with the sales force of Corvalla FEMSA is extremely valuable. That doesn't mean they have to participate in the execution of the actual sale and implementation of the platform. But the relationship with them, the simple introduction by the sales force of Coca Cola FEMSA is very valuable to getting your foot in the rhythm on the pop.

[Martín Yániz, CFO at Fomento Económico Mexicano]

Number two, premier points do seem to be a differentiating factor relative to other payment platforms that don't have the same thing. And we are noticing in the stores, people sometimes have two to three terminals. So don't they haven't yet committed to any one terminal. So they will have MercadoLibre terminal and they will have the Santander product and they'll have a third one. And they will pick and choose which terminal they use depending on the value proposition.

[Martín Yániz, CFO at Fomento Económico Mexicano]

So you need to have a value proposition, which basically can compete in all the different elements with all the different platforms. Next thing we've learned is points of sale mother pops value the cash flow. They are a CFO's dream in how they understand their cash flow needs and managing their cash cycle. It really is spectacular to see. And for example, you need to move to crediting balances almost immediately for them as opposed to doing it once a day or doing it twice a day.

[Martín Yániz, CFO at Fomento Económico Mexicano]

If you're not doing that for them, you will not be able to maintain competitiveness over time. So a lot of these smaller fintechs that whose model was based on a float for two, three days of money coming in, that's not going to work and that's not going to cut it. There is definitely kinks to work out in terms of how you allow that mom and pop to use the cash flow for Pine Points and for crediting the payment of bills that they receive. That's a bottleneck that needs to be worked out and nobody's really figured it out. And finally, the mom and pop owner is fundamental.

[Martín Yániz, CFO at Fomento Económico Mexicano]

You can just see the difference between a mom and pop where the owner of the store understands the value that this brings to them and how they engage with the consumer to remind the consumer that they have they give points. They remind the consumer to consume points. And there was one lady in particular that I met who was just amazing at how she did. She has a balance of the points that she receives and the points that she gives out. So she's not buying any points.

[Martín Yániz, CFO at Fomento Económico Mexicano]

She's net net zero because she manages constantly the points that she receives versus then making sure she uses those points to generate revenue for her store. So those are the learnings we're having. And we purposely kept the experiment in one city and relatively small so that we learn all those things before we do massive rollouts in either any city or in any region.

[Alvaro Garcia, Associate Partner at BTG Pactual]

Awesome. Thanks for the color.

[Martín Yániz, CFO at Fomento Económico Mexicano]

Thank you, Oliver.

[Operator]

We will take our next question from Hector Mayes, Scotiabank. Your line is open. Please go ahead.

[Héctor Maya, Associate Director - Equity Research at Scotiabank]

Thank you very much, Jose Antonio, Martin and Juan for taking my questions. Just if you could please expand on the initiatives for more affordable brands at OXXO, just to understand the potential extent of the push for value brands and affordability. And we'd love to know if this could eventually translate into a longer term strategy, maybe also focusing more on private label or if this is more strategic and short term and more focused on the size of product presentation due to the current macro?

[José Carbajal, Executive Chairman & CEO at Fomento Económico Mexicano]

Great, Hector. So I would say, obviously, private label would play a part in certain especially in our grocery with our say, cooking oil Posada, we have our beef snacking and those will play a part. But I would say the biggest contributors are things we're working on with our major suppliers in hey, let's launch either a value brand together. We're doing it with Calacro with quite impressive results now for this month. They're not we're not seeing a big shift again from their premium brands to their local brands or the value brands and we're trying to privilege that.

[José Carbajal, Executive Chairman & CEO at Fomento Económico Mexicano]

They have to be marginal expansion in traffic and gross margin even if it's a smaller gross margin that it helps us with incremental revenue. And then for beer and soft drinks, we are doing two types of strategies. One is coming back to returnable packaging. Returnable packaging is a complex operation for us in the convenience store. It's messy.

[José Carbajal, Executive Chairman & CEO at Fomento Económico Mexicano]

It saturates our warehouse. But we know how to do it and we know how to do it well. And we're going back to that with our soft drink partners and with our beer partners and that's going to play a major plan. Then I would say we are doing some things with Andati, our coffee offering, some promotions on Andati and some extra small piece of bread or a small snack or something in when you buy two coffees and things and we're seeing good opportunities there and we're rolling out more promotions there. But I would say those are the main ones.

[José Carbajal, Executive Chairman & CEO at Fomento Económico Mexicano]

Juan mentioned the mini spirits bottles that we launched back actually in 2018. We're launching them again. I mean they've been already there, but we're launching new flavors, new variety and they tend to work very well. We're also doing some cookie assortments and some snacks that's on the value. And all of those things will help us.

[José Carbajal, Executive Chairman & CEO at Fomento Económico Mexicano]

I would say, we have an opportunity to expand on grocery. As Juan mentioned, we tend to become a very interesting point of interest for the value conscious consumer that values smaller packages, more frequent visits to the store with the cash on hand. And we want to remind everyone that we are a great player for the those Patico de la Oro promotions that we executed in the past with a lot of success that I think we need to showcase again. So all those things are being launched as we speak and we'll get some results.

[Héctor Maya, Associate Director - Equity Research at Scotiabank]

Got it. Thank you. And also quickly with what you are seeing in The U. S. And your view on adapting the value proposition, how much time do you think it could take you to say, okay, we've got it right now.

[Héctor Maya, Associate Director - Equity Research at Scotiabank]

We are ready to push for much stronger organic growth with the right assortment of prepared food. So could we consider that this could happen maybe in the next two years? Or should it be more like five years from now? I'm just a bit curious on how you're thinking

[José Carbajal, Executive Chairman & CEO at Fomento Económico Mexicano]

about Yes. I was going to tell you I'm not ready to give you an update, but I think within the next two years we're able to have a winning value proposition given what we are seeing in the momentum in West Texas with OXXO, given that we get a lot of feedback from the consumer of what they want. But I do think we need to be not only better than the rest, but also unique. And unique means it's a tough thing to nail. I mean, there's very good players out there.

[José Carbajal, Executive Chairman & CEO at Fomento Económico Mexicano]

But I think they're very it's very easy to go to the stores, learn what's working and copy that. What's going to really make us win is something that only OXXO can deliver and that really drives traffic away from the mainstream big players and from the big regionals that I mentioned.

[Héctor Maya, Associate Director - Equity Research at Scotiabank]

Perfect. Great. Thank you very much. Thank you.

[Operator]

We will take our next question from Ulysses Arghot, Santander. Your line is open. Please go ahead.

[Ulises Argote Bolio, Executive Director at Santander]

Thank you very much. Hi, Jose, Martin, Juan. Thanks for the added insights. I thought that's very appreciated. I just wanted to see if you could provide some more color into the rebranding there of PK to in The U.

[Ulises Argote Bolio, Executive Director at Santander]

S. I know it's super, super early and Otti made some comments already on this. But any readings or maybe any expectations into sales and profitability profitability, sorry, lift on the rebranding and the fine tuning of offerings you're doing there on the value proposition? And also is there any time line you guys are targeting? And maybe should we expect 100% rebranding of the stores?

[Ulises Argote Bolio, Executive Director at Santander]

Or what's the

[Ulises Argote Bolio, Executive Director at Santander]

strategy there? Thank you so much.

[José Carbajal, Executive Chairman & CEO at Fomento Económico Mexicano]

So it's too soon to tell. They've been for pricing us on the upside. The increase in sales and traffic has been significant, I would say, even in the double digits for the first store.

[José Carbajal, Executive Chairman & CEO at Fomento Económico Mexicano]

We just rebranded another 14. So and we're seeing very similar increases. There's probably a honeymoon phase and they should stabilize. So again it's too soon to tell. But yes, eventually we would convert if not all the stores 99%.

[José Carbajal, Executive Chairman & CEO at Fomento Económico Mexicano]

I mean maybe there's a couple of them that are either on the issue of probably closing. And we're also going to open a few stores. We're planning to open a few stores even this year to try out. But again, it's on the it's below 10%. And we're just going to see how the momentum of it works.

[José Carbajal, Executive Chairman & CEO at Fomento Económico Mexicano]

And we're trying different concepts. We're doing one store more geared towards grocery and like a blend of a dollar store with a convenience store. We're doing one much more geared towards coffee offerings. Willing to take those experiments because we really want to learn what works and what we can roll out nationally. So we're going to take our time.

[José Carbajal, Executive Chairman & CEO at Fomento Económico Mexicano]

But so far we're very happy with the OXXO brand in West Texas. It's been a very happy surprise and we see a lot of excitement for the brand in the region.

[Ulises Argote Bolio, Executive Director at Santander]

Perfect. That's good to hear. Thank you very much.

[Operator]

We will take our next question from Froylan Mendez, JPMorgan. Your line is open. Please go ahead.

[Fernando Froylan Mendez Solther, Executive Director at J.P. Morgan]

Hello, guys. Thank you very much for

[Fernando Froylan Mendez Solther, Executive Director at J.P. Morgan]

taking my question. I want to dig a little bit more into Barra. Given the opening of the new distribution center, should we expect the pace of openings to accelerate in coming years even this or the next? And what is the long term store size that you see for this format? And also in the same route, what was your intake on how the format performed this quarter specifically?

[Fernando Froylan Mendez Solther, Executive Director at J.P. Morgan]

What you saw losing in OXXO? Was this something that was captured by the Vara format? What was your take on the downtrend that we're seeing in Mexico? Thank you guys.

[José Carbajal, Executive Chairman & CEO at Fomento Económico Mexicano]

So, yes, Vara keeps doing great. We did see a slower momentum from the fourth quarter of last year where we were growing high on the teens on the same store sales basis and we saw single store single growth or single digits. But still Vara is doing incredibly well. The stores the new stores are performing even better and we see a huge opportunity ahead. Yes, we want to accelerate the expansion.

[José Carbajal, Executive Chairman & CEO at Fomento Económico Mexicano]

The reason we are not expanding as fast as we want is because we are working hard internally on decoupling from OXXO. It's a concept that's still on the same LLC or equivalent of OXXO, the same systems. So we're changing all that and that's taking us some time to do that. But we are using basically we're having to invest in a big set of teams to have the new BARDA in place and that will allow us to basically double our rate of expansion from two thirty that we're planning for this year to more than double that in the next couple of years. We do think there's room for many thousands of paras.

[José Carbajal, Executive Chairman & CEO at Fomento Económico Mexicano]

I would I wouldn't give you a number a precise number, but there's going to be thousands of paras in Mexico and that segment is gaining a lot of momentum. There's a lot of people that are understanding the great value that the discounts for spring. And we have a huge opportunity because we know what works. Basically, we've done a lot of ops in regions where Bada would have been successful and now we're learning a lot how the Bada concept can bring a lot of value in those neighborhoods. So we're very excited from what we're seeing and we're just getting our stores keep getting better and better and performing better and better.

[José Carbajal, Executive Chairman & CEO at Fomento Económico Mexicano]

So yes, the sky is the limit.

[Martín Yániz, CFO at Fomento Económico Mexicano]

And I would add, Roy, on the Vara side. I mean, we talked a little bit about private label and how the mix of private label at Vara is still lower than we would like. We're probably somewhere in the 20s 30s 30s approaching 30s and some of our competitors are higher than that. And so what we're seeing is having some really good conversations with potential partners on the private label side, large corporations from different parts of the world that look at the opportunity for Bayer and say, I'm happy to accompany you. I'll build a plan for you if we can we have the companies that we can work together for the long term.

[Martín Yániz, CFO at Fomento Económico Mexicano]

So again, I think scale is a beautiful thing. And as we're getting a little bit bigger and there's the overall FEMSA umbrella, if you will, and the OXXO umbrella that gives potential partners the confidence that we're going to do what we say we're going to do. And things are moving into place quite nicely.

[Fernando Froylan Mendez Solther, Executive Director at J.P. Morgan]

Thank you very much. Appreciate it.

[Operator]

We will take our next question from Rodrigo Alcantara, UBS. Your line is open. Please go ahead.

[Rodrigo Alcantara, Equity Research Director at UBS Group]

Hi. Thanks for all I can tell Jose, thanks for taking my question. One, Martin, just one, I promise. Just I mean, in the context of an average store having seven employees per store, right, three turns, it's a bit difficult for me to understand how much more lean goods the staff the stores the labor structure of a store could get. So just curious if you can elaborate a bit more here on precisely on these initiatives of having a more staff per store.

[Rodrigo Alcantara, Equity Research Director at UBS Group]

And just for the sake of modeling, if you can comment on when you started to deploy these initiatives kind of like the ramp up of the initiatives just for us to kind of have an idea when we could see the implications on margins already reflected? That would be my question. Thank you very much.

[José Carbajal, Executive Chairman & CEO at Fomento Económico Mexicano]

So we've been working a lot in the number of stores number of people per store and we are already below the seven threshold. Actually, were at 6.7 last year. We're aiming for 6.5 this year. And see as you can imagine at our scale going from 6.7 to 6.5 is a huge endeavor without damaging the value proposition. And that is giving you that some stores are going all the way to 10 or 12 people because some high traffic stores have much more people.

[José Carbajal, Executive Chairman & CEO at Fomento Económico Mexicano]

And some stores are working with five people. And we are being much more precise on our analysis. We used to do a number of transactions and pretty much that's it. Now if it has a lot of coffee and coffee requires a lot of cleaning and we may put more people or if there's a lot of financial services they may require a little bit more people. Sometimes they require in regions like Oaxaca and Chappell we need people with banking experience that have been bank tellers because they need to count deals very quickly.

[José Carbajal, Executive Chairman & CEO at Fomento Económico Mexicano]

And so we've been keen to specialize much more in the level of people and the size of people that we can hire. And we have an initiative we call Treo that is basically using all these machine learning and analytics to be much more precise on the amount of people that the store needs to have. Where can we get? I mean our ambition is let's get it as low as possible without harming at all the value proposition. If that is 6.3% or 6.2%, I think it's to avoid, but it's going to take us a while to get there.

[José Carbajal, Executive Chairman & CEO at Fomento Económico Mexicano]

Obviously, the retail landscape is changing and there's more and more tools for automation. Some of them are still decades away in this part of the world, but some of them are not. And we will use and we're leaning aggressively on understanding how machine learning, how even LLMs can help us optimize not only the store but the supervisory stuff part of the role and get to more stores per supervisor. And we see an opportunity there as well to do some gain some scale there. And I think we will continue to monitor that number get leaner and leaner on that front, not necessarily requiring to less people because we are still opening enough stores.

[José Carbajal, Executive Chairman & CEO at Fomento Económico Mexicano]

So we will be able to accommodate hopefully all of our good performers and all of our good supervisors. So we see still a lot of opportunity for growth and for becoming leaner.

[Martín Yániz, CFO at Fomento Económico Mexicano]

And I think another thing Rodrigo maybe we've talked about this in the past a little bit, but it involves as you might imagine certainly the number of people, but also things like what time do they start their shift. So going from the kind of the basic three shifts, each shift comes in at the same time to a much more dynamic well, one person can come in at x hour and then the other person comes in three, four hours later because that's what the numbers tell us. They're not needed at the same time. So again, something that sounds relatively straightforward, but you need the data to tell you how to do it. And obviously, we're

[Martín Yániz, CFO at Fomento Económico Mexicano]

assuming there are going

[Martín Yániz, CFO at Fomento Económico Mexicano]

to be more minimum wage increases in the coming years. So this is something that not only addresses what's already happening, but we need to be ready for the coming years where this probably will continue.

[Rodrigo Alcantara, Equity Research Director at UBS Group]

That was super helpful, Jose and Juan. Thanks for the color on that.

[José Carbajal, Executive Chairman & CEO at Fomento Económico Mexicano]

Thank you, Jose.

[Operator]

We have no further questions in the queue. So I will hand you back to your host for closing remarks.

[Martín Yániz, CFO at Fomento Económico Mexicano]

Thanks everyone for joining. Obviously, know where to find us. If you have follow ups, you can get in touch with my team and myself anytime you need. Otherwise, just have a great week. Thank you, everyone.

[Operator]

Thank you

[Operator]

for joining

[Operator]

today's call. You may now disconnect.

Participants

Analysts

• Juan Fonseca, Director - IR at Fomento Económico Mexicano
• José Carbajal, Executive Chairman & CEO at Fomento Económico Mexicano
• Martín Yániz, CFO at Fomento Económico Mexicano
• Thiago Bortoluci, Equity Research Vice President at Goldman Sachs
• Analyst
• Robert Ford, Analyst at Bank of America
• Ricardo Alves, Analyst at Morgan Stanley
• Alvaro Garcia, Associate Partner at BTG Pactual
• Héctor Maya, Associate Director - Equity Research at Scotiabank
• Ulises Argote Bolio, Executive Director at Santander
• Fernando Froylan Mendez Solther, Executive Director at J.P. Morgan
• Rodrigo Alcantara, Equity Research Director at UBS Group