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FEMSA to Enter U.S. Cash & Carry Segment With JRD Stakes

Zacks Equity Research

Fomento Economico Mexicano, S.A.B. de C.V. FMX, alias FEMSA, signed a non-binding Memorandum of Understanding (MOU) to buy a minority stake in Jetro Restaurant Depot (JRD), a leader in the wholesale business-to-business cash and carry retail foodservice unit in the United States. The company will begin a Joint Venture (JV) with JRD to take JRD’s business model to Mexico and other Latin American markets.

Per the MOU, FEMSA will acquire stakes in JRD for about $750 million. The company anticipates signing a definitive agreement to validate the MOU in the month of October, with the deal likely to close in fourth-quarter 2019. However, the deal remains subject to satisfaction of customary regulatory approvals and conditions.

The deal will mark FEMSA’s entry in the U.S. wholesale cash and carry business segment. It will also provide the necessary background to form a new JV that can aid growth in its core markets.

Over the years, the company has been taking prudent steps to diversify its product portfolio while expanding in the small-box retail segment. Its recent agreement to form a 50-50 JV with Raízen Conveniencias in Brazil, marking FEMSA Comercio’s entry in the country’s convenience sector, clearly justifies its expansion plan. The deal, which enables FEMSA Comercio to buy a 50% stake in Raízen for R$561 million, is likely to close in the second half of 2019.

This follows FEMSA Cadena Comercial OXXO’s (OXXO stores) commercial pact to sell Grupo Modelo’s beer brands, including Corona and Pacifico, signed in February 2019. Notably, OXXO stores exclusively sold beer for Heineken’s HEINY Mexican subsidiary — Cervezas Cuauhtemoc Moctezuma — under the 10-year commercial agreement that dates back to 2010. FEMSA extended the pact with HEINEKEN Mexico for another five years, with some key changes, including provisions for the sale of beer brands from Heineken and Grupo Modelo in Mexico.

Starting from 2019, OXXO stores are simultaneously selling both brand portfolios in Mexico’s biggest cities, including Mexico City and Guadalajara. This will be extended to stores nationwide by 2022. These deals will not only enhance the productivity of the beer category but also add value to the Mexican beer industry. It will also boost the value proposition of OXXO stores, which contributes nearly 35% to FEMSA’s revenues.

Moreover, FEMSA, which shares space with Monster Beverage MNST and PepsiCo PEP, is focused on expanding drugstore operations as it sees significant potential in that space. It is aggressively seeking to capitalize on the growing drugstore industry through the acquisition of Ecuador-based Corporación GPF (“GPF”). Further, FEMSA is on track to build infrastructure and integrate its four legacy drugstore operations into a single operating platform. These include its previously acquired Mexican drugstore business — Farmacias YZA, Farmacias FM Moderna and Farmacias Farmacón — as well as South America’s leading drugstore operator, Grupo Socofar. We believe that the company’s venture into the drugstore business strategically fits its chain-store business and will be accretive to its top line and bottom line in the long term.

Notably, this Zacks Rank #2 (Buy) company has increased 9.6% so far in a year compared with the industry’s growth of 13.2%. Shares of the company have increased around 6% in the past one month.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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