Fomento Economico (NYSE:FMX) reported third-quarter financial results on Wednesday. The transcript from the company’s third-quarter earnings call has been provided below.
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Summary
Fomento Economico reported a 9.8% year-over-year increase in total revenues and a 9.9% growth in operating income for Q3 2026, driven by strong performances at OXXO Mexico and Coca-Cola FEMSA.
OXXO Mexico’s same-store sales grew 9.2%, with traffic increasing by 3.5% and average ticket size by 5.5%, despite minimal World Cup impact.
The company continues to expand, opening 734 new stores in Mexico year-to-date, but net store openings fell short of the 1,000 target due to closures of underperforming stores.
FEMSA’s net consolidated income rose by 81%, influenced by a favorable comparison base and foreign exchange gains.
Coca-Cola FEMSA reported a 10.9% increase in revenue, with operating income up 15.4%, bolstered by strong performance in South America.
Capital expenditure for the quarter was 9.4 billion pesos, and a new share buyback program was announced, further committing to shareholder returns.
The company is seeing promising growth in its BARA concept and aims to expand its store base, focusing on customer needs and private label development.
Management emphasized their strategic focus on balancing profitability with traffic growth, leveraging their market position to manage costs and optimize store performance.
Challenges include managing labor costs and adapting to a potentially more competitive consumer environment in Mexico and Brazil.
Full Transcript
Carolini (Operator)
Hello and welcome to the Fomento Economico third quarter 2026 conference call. My name is Carolini and I will be your moderator for today’s event. Please note that this conference is being recorded for the duration of the call. All participants will be in listen-only mode. You will have the opportunity to ask questions at the end of the presentation. To do so, please use the Raise Hand feature in Zoom and we’ll open your line. If you experience any technical issues during the call, please use the chat function to request assistance.
I would now like to hand the call over to Mr. Juan Fonseca, Investor Relations Director at Fomento Economico. Please go ahead.
Juan Fonseca (Investor Relations Director)
Good morning, everyone. Welcome to Fomento Economico third quarter 2026 results conference call. Today we are joined by Jose Antonio Fernandez Garza, Fomento Economico CEO; Martin Arias, our CFO; and Pamela Ortiz, who heads the Investor Relations team at Coca-Cola FEMSA. The plan is for Jose Antonio to open the conversation with high-level comments on the quarter’s performance and trends, zooming in on OXXO Mexico’s results, followed by Martin, who will provide more granular details on the results across our business units.
Finally, we will open the call for your questions. Antonio, please go ahead.
Jose Antonio Fernandez Garza (Chief Executive Officer)
Thank you, Juan. Good morning, everyone. The third quarter was a strong one during which our two main engines, OXXO Mexico and Coca-Cola FEMSA, delivered strong results, showing an improvement in many of the variables we are trying to impact and thus reinforcing our confidence in our strategy and its effectiveness. At OXXO Mexico, our year-long effort to drive customer traffic while protecting our profitability produced solid results, while Coca-Cola FEMSA continued to improve results in Mexico and had a very strong set of numbers in South America.
Beyond the two big engines, exciting things are happening across all other business units. In particular, during the quarter we saw BARA sustaining its pace of store base expansion and improving its maturation curve, while OXXO Latam continued to deliver promising results across South America with Colombia leading the charge. However, this morning I would like to focus my remarks on OXXO Mexico by covering two topics. First, the continued recovery, sales and traffic, which gained further traction during the third quarter, and second, OXXO’s profitability, including how we are balancing the different levers of our value proposition and the strategic framework and operating discipline that are helping us to address the challenges we face. After that, Martin will elaborate on the developments at other business units in his remarks.
Let me begin with sales and traffic. On our last call and in many of our conversations with you since then, a recurring question was how much of our performance was structural and how much driven by the World Cup. The third quarter gives us a good read on that issue with very little benefit from the tournament. With only one Mexico match in early July, same-store sales grew 9.2% in the quarter, driven by an increase of 5.5% in the average ticket and 3.5% in average traffic.
Given that ticket growth is nominal and includes the impact from excise tax increases on soft drinks and cigarettes, the highlight of the quarter is traffic coming in 150 basis points above the level reported in the second quarter. Despite having only a small benefit from the World Cup, while warmer weather provided some support, our data suggests it explains only part of the results. More importantly, the performance reflects a solid response from our customers to the strategy we described on our last call, putting the customer at the center of everything we do at OXXO and executing against our four strategic pillars of impulse, food service, daily and replenishment, and beyond-trade services. Furthermore, this positive customer response is also translating into market-share gains. According to the market data available through August, OXXO continues to gain share against all relevant trade channels in the categories in which we compete.
Year to date, our market share in the categories in which we compete is now above 2024 levels, with most of the gains concentrated in our core impulse categories—precisely where these adjustments have advanced the most so far. This is a promising performance beyond the impulse occasions. Food service is another area where we have seen progress, with traffic growing at a low double-digit rate driven mainly by coffee. This has been the result of improved execution across our stores and tactical pricing, which helps us drive incremental cups per day. For its part, daily and replenishment is at a very early stage of testing, but its initial results are already modestly accretive to traffic. Together with services, which is also growing in traffic terms, we see meaningful opportunities.
As we continue to develop all these categories, we are still fine-tuning our approach and there is room to further refine our value proposition across the different strategic pillars. We continue to test and learn from many initiatives, including structured price experiments across categories in selected regions, revamping our stores’ coffee area and value proposition, and testing the Canasta OXXO, our offer of everyday essentials at accessible price points, among others. These experiments are focused on gaining a better understanding of the right mix of assortment, price, and promotions to accelerate traffic and sales.
In those cases where we have adjusted the price-packaging architecture, we monitor very carefully whether the resulting increase in volume is enough to offset the margin impact from the price reduction or switch from higher price points to lower-price-point SKUs. We know that not every test will work, but this process will allow us to scale only those that prove their overall positive value contribution. Now let me turn to profitability. We manage our value proposition from an integral perspective. This includes price, gross margin, assortment, and in-store execution, including promotions and commercial income, all of which play an important role in enhancing value for our customers. Behind these levers are changes in our price and packaging architecture and in our overall mix, as well as in the commercial income we generate working with our supplier partners, which is quite dynamic.
What we were able to achieve this quarter is a better balance across all these levers to drive traffic while protecting our profitability. While the reported gross margin contracted by 120 basis points, this contraction reflects in part a demanding comparison base, as the third quarter of 2025 included a particularly high concentration of commercial income. Normalizing for this effect, OXXO Mexico’s gross margin would have declined in line with the 70-basis-point contraction of the second quarter of 2026.
In addition to this timing of commercial income issue, the gross margin result reflects the mix effects coming from affordability initiatives being offset by higher commercial income and by solid growth in higher-margin services. This is an important point, as it shows that we are managing our affordability strategy in a rational and disciplined way, always leveraging OXXO’s relevance as a commercial channel for our supplier partners rather than trading gross margin for market share.
In absolute terms, gross profit grew 7.4%, operating income grew 5.8% during the quarter, and operating margin contracted by 40 basis points. This includes an impact of approximately 20 basis points from the closing of 140 older, underperforming stores. Excluding these closures, operating income would have grown 8%. Closures are part of a broader pruning exercise involving approximately 250 stores, and we expect a similar impact in the fourth quarter as we complete the process.
While this measure affects near-term results, we believe it is healthy to periodically review our store base and prioritize the long-term profitability of the business. The quarter’s results also reflect the team’s focus on operating discipline, which has been just as relevant as the commercial strategy in the context of increasing wages well above inflation and the upcoming labor reform relating to the reduced workweek. Expense efficiency continues to be a central part of how we run OXXO, and we are in a permanent effort to find new ways to optimize spending.
Summing up, I believe the third quarter is a good example of how our strategy is meant to work. We balance the different levers of our value proposition to bring incremental traffic to our stores, and we translated that volume into growth in gross profit and ultimately in operating income in absolute terms. That is, in essence, the algorithm behind our strategy, and it is how we manage the business with a focus on growing the absolute profit pool over time.
Having said that, we are not complacent. The consumer environment in Mexico remains soft, and our comparison base will gradually become more demanding as we move forward. But we are confident that we have the right strategy, the right team, and a clear view of the levers at our disposal to keep executing and delivering on that strategy. And with that, let me turn it over to Martin to go over the numbers in more detail. Thank you.
Carolini (Operator)
At this time, we’re going to open it up for questions and answers. If you have a question, please click on Raise Hand for audio questions or write them in the Q&A section for written questions. Please remember that your company’s name should be visible for questions to be taken. Please limit yourself to one question at a time, and if you have a second question, please get back in the queue. We do ask that when you pose your questions you pick up your handset to provide optimal sound quality.
Please hold while we poll for questions. Our first question comes from Enrique BrustoLink with Bradesco BBI.
Enrique BrustoLink (Analyst)
Hello, Jose Antonio Martin, thank you for taking my question. Mine is about the traffic recovery in OXXO Mexico, right? Traffic has been recovering now for two consecutive quarters and there are several initiatives that you are implementing, but most of the improvement, based on your initial remarks, appears to be coming from the core improved categories. Which is interesting, right? Considering the soft consumer environment overall in Mexico. So the question is, how do you see the elements of OXXO’s value proposition relative to the other retail channels that are allowing you to capture this much share over the recent quarters?
Jose Antonio Fernandez Garza (Chief Executive Officer)
Hola, Enrique, thank you for your question. So it’s hard for me to talk about other retailers. I think it’s obvious that some of them are maybe underperforming, but we are very much focused on what we need to do. And it’s true that by far the biggest high traffic growth has come from where what we do good we become much better at doing, especially with adding some value assortment presentations into our core categories—energy drinks, soft drinks, beer, cigarettes, et cetera.
But to be honest, we are seeing very good positive traffic growth cross geographic regions. So all of our regions grew traffic on the quarter, which is a very positive sign. Not all of them at the same rate, but all of them grew. And that tells you that I think we had either very favorable weather throughout the country or we are becoming better at our job. And then the other three strategic pillars, we are seeing also traffic growth. It’s just being driven much more by impulse, but we are seeing traffic growth in services, financial and non-financial. We’re seeing traffic growth in food service, mainly driven by coffee, and we are seeing some traffic growth, although not yet same-store sales growth, but we do see traffic growth in what we call essentials or daily replenishment. So very encouraging what we’re seeing.
We would much rather be in an industry with much stronger consumer sentiment. So everyone should be everyone growing and we growing more than the rest is our better place to be. But we’re very, very much encouraged by our market share gains and how we are seeing a much more enthusiastic consumer coming into OXXO for their daily needs, for their weekend parties, et cetera. So very encouraging figures for us. We hope the Mexico consumer sentiment begins to improve.
Enrique BrustoLink (Analyst)
Very clear. Thank you very much.
Jose Antonio Fernandez Garza (Chief Executive Officer)
Thank you, Enrique.
Carolini (Operator)
The next question comes from Ben Thurer with Barclays.
Ben Thurer (Analyst)
Good morning. Good morning Wendy, Jose Martin, Juan, thanks. Thanks for taking my question. Just maybe picking up on that first question Henrique just had and thinking a little bit forward as we’ve seen all these changes. So as we think with the improvements that you’re doing—assortment, et cetera—but then also the asset pruning, clearly we’re still at a, call it, relatively easy base of comparison, hence obviously with the acceleration here in traffic growth.
But if you put these aside shorter term and you think more medium term, where do you see the opportunities and restructured traffic opportunities for you guys in OXXO Mexico in particular once you’ve cleaned up the asset base, done the pruning, you have your stores, you have the services and so on? What is a normalized traffic assumption or target for internally, and what we should basically think about it going forward?
Jose Antonio Fernandez Garza (Chief Executive Officer)
Thank you, Ben. I wish I had a crystal ball to tell you where we’re going to be in terms of traffic. Obviously, we are not yet satisfied with our results. Even though we are encouraged by seeing progress all over our initiatives and our levers, we are not satisfied. We think we can do much more. I’m hopeful that what’s going to help us and carry us forward in the next few months is that some of our initiatives in food service are going to get better, bolder. Our execution is getting better at understanding what really drives coffee traffic and other food items. We are hopeful, although still in very early stages, of our canasta OXXO proposal, and we’re still seeing some interesting traffic drivers from our financial services and non-financial—cash-out, et cetera.
We’re still very cautious on giving you guidance on next year. It’s going to be a tough year. I think we’ve had favorable weather this year; we may expect a rainier and colder fourth quarter. October, although it’s coming, is looking like it’s going to be positive. On traffic, we did experience much more rain than September nationally. So we are cautious that the consumer remains, you know, very cautious and looking for affordability. That should help us on our BARA proposal and it should help us in some of our initiatives in OXXO. But I think we should remain cautious and also plan for the worst in terms of maintaining our operating costs as lean as possible. That’s my read so far for the rest of the year.
Juan Fonseca (Investor Relations Director)
Yeah, I think I would just add even this one. You know, the way I think about it is the impulse part of it, in some ways, is like the path of least resistance. It’s where, you know, we’re already very good and it’s really more about, you know, improving certain things and kind of getting back to the top of our game. But that’s more immediate and that’s why we’re beginning to see it already. If you think about some of the other pillars, especially if I think about food service and I think about the daily replenishment opportunity, I mean, those could be driving incremental traffic for a while. And by that I mean years. If we succeed in either of those, those could be very material in the medium term, right. So we’re still testing different menus. We’re still, you know, beginning to tinker with the daily opportunity. But I guess chronologically it was always going to be impulse first and then the others materializing, I would say from next year forward.
So at least as you think about modeling, that’s how I would think about it.
Ben Thurer (Analyst)
Thank you very much and congrats on the results.
Jose Antonio Fernandez Garza (Chief Executive Officer)
Thank you, Ben.
Carolini (Operator)
The next question comes from Lucas Musi with Morgan Stanley.
Lucas Musi (Analyst)
Jose Antonio, Juan, thank you for taking my question. Still on OXXO, same-store sales and the new initiatives regarding the value proposition, I wanted to go back a little bit on the food service and the replenishment part of it. On your commentaries, Jose Antonio, just wanted to better understand what it is—what is the goal? What is it that you’re targeting over the medium to long term in terms of how you’re thinking about an OXXO store, let’s call it five years from now?
Are you aiming at something closer to what a traditional convenience store looks like in the U.S., with more food service? Are you targeting a better margin coming from the food service initiative? Replenishment, although you could argue it is a lower profitability category, are you seeing that driving a significant amount of volumes over the medium to long term? Just thinking about how you would envision the OXXO store five years from now in terms of the breakdown in your portfolio between the food service, the still-on-initial-stages replenishment, and also the impulse category, which is your core today.
Just trying to get a little bit more perspective on that. Thank you.
Jose Antonio Fernandez Garza (Chief Executive Officer)
Thank you, Luca. It’s a good question. Look, we obviously are inspired by many of the things we see developing in food service in the U.S. I think the convenience store industry is doing a tremendous job in certain regions and certain players. But obviously the Mexico consumer is very different. We still believe in our food service approach. We have a long way to go. Just by comparing ourselves with other offerings within Mexico and what the Mexican consumer is seeking in their everyday quick morning breakfast ritual, in their snacking options, et cetera, we see that our relevance in the impulse categories and in the everyday lives of the Mexican consumer deserves a better percentage of that in the food service.
I hope that we can triple our percentage of food service dependency in OXXO like we already have demonstrated in markets that are much more similar in consumer trends like Peru, Chile, and Colombia, where our numbers are almost triple in terms of the percentage that we sell with similar same-store sales revenue per store. So I foresee, I am encouraging and getting the team rallying behind an ambition of tripling our percentage of food service. And that would be huge, and it’s margin accretive, and we will become much more relevant than we already are for the lives of the Mexican consumer.
And that excites us. In terms of daily replenishment, I think we have two big levers to pull. One is obvious: to give very low prices and low per-gram prices and also low disbursement options and SKUs for our consumers. But to be frank, we already give them a huge advantage that many of the players that compete in that space do not give, which is we save them time. We’re everywhere, and people are sick and tired of going to the big-box retailer to buy their big basket items.
And we have an advantage to serve them there. And we are seeing an opportunity there to save them money, save them time, give them peace of mind. We’re very encouraged by the very early testing that we’re seeing in some of the stores that we are tinkering in Chihuahua and Tijuana. And I also think that is going to be obviously much more traffic accretive than margin accretive, but we’re becoming more and more relevant in the lives of the Mexican consumer, and that is how we see it.
It’s hard for me to give you a number, but I do see an evolution of the store that becomes much more savory in terms of food service options and gives peace of mind for your daily replenishment needs in weekly assortment, et cetera. And we have a lot to copy or learn from other retailers in the U.S., but also from what we’re seeing in Mexico with some of the discount players, and we can leverage our footprint. Hope it’s helpful.
Lucas Musi (Analyst)
Very helpful indeed.
Jose Antonio Fernandez Garza (Chief Executive Officer)
Thank you.
Carolini (Operator)
The next question comes from Thiago Bortolucci with Goldman Sachs.
Thiago Bortolucci (Analyst)
Hey, guys. Good morning, everyone. Congrats on the results and thanks for the space to ask questions. I’d like to continue in OXXO Mexico but now targeting more the SG&A line, where I think you delivered remarkable results in this quarter. Obviously, we understand the pressures on the gross margin, the adjustments on the underlying basis, but it seems that, adjusting for the calendar of commercial income, SG&A has more than compensated the lower gross margin, right.
And this has been a trend throughout the year. I know—and I think it was like two companies ago on the call—you commented about the restructuring on headcount and the corporate structure, merging Health and Proximity. I would just like to understand how much of this is already being captured in the numbers in the third quarter, and how should we think about SG&A going forward, particularly in this scenario that you mentioned that labor could be more of a concern next year.
Thank you very much.
Jose Antonio Fernandez Garza (Chief Executive Officer)
Generally I do think that we’ve captured a significant portion by this point of some of the initiatives around the corporate overhead and operating overhead that we had. Maybe there’s one, maximum two quarters of tailwinds there to continue to see flowing through. Remember we also did an important restructuring at the proximity and health division with significant savings there that were collapsed together with our sub-corporate teams. Next year the government has announced a 13% increase in minimum wage accompanied by a reduction in the work week. So you will certainly see the effects of that in our selling expenses again because we pay higher than the minimum wage. The reality is not all of that gets translated exactly percentage point per percentage point. But you will continue to see labor expenses as a percentage of revenues increase, probably more in the short term as we continue to focus on our affordability initiatives.
However, again, we are constantly reviewing the operating model, how we can bring technology to bear at the store to make our colleagues in the store more efficient. And all the initiatives around dynamic shifts and use of technology continue to be implemented. Just the other day I was sending Carlos Arroyo some pictures they sent me of a robot that measures the inventory on the shelves. And you can just leave the inventory as shelves going through, giving you quick data.
When that will become economically and technologically viable in Mexico, I can’t really tell you. Can we have small robots doing part of the cleaning inside the store now? Since we’re leaving the stores open 24 hours, maybe we can dedicate an hour or two of that time to running this with robots while the person who’s in the store is doing other things in the store. But the pressure will continue. This is a stated policy of the government and we will need to react. As all retailers and all consumer companies, we will need to react accordingly, finding the balance between those costs and ticket.
Thiago Bortolucci (Analyst)
Thank you, Tiago. It’s helpful. Thank you very much, guys.
Carolini (Operator)
The next question comes from Alejandro Fuchs with Itaú BBA.
Alejandro Fuchs (Analyst)
Thank you, operator. Thank you for the space for questions and congratulations on the results. One very quick regarding expansion, growth of the business and I think your initial remarks about—
Carolini (Operator)
Alejandro. We are. We’re listening. You’re a little bit broken up. Broken up. Can you either get closer to the microphone or— Every third word. We don’t hear every third word. Yeah. Can you try again?
Alejandro Fuchs (Analyst)
Yeah, sorry. Is this— Is this better?
Carolini (Operator)
Yes, it looks better.
Alejandro Fuchs (Analyst)
Okay, thank you. No, my question is on growth. It seems that, you know, you— I think you alluded, Jose Antonio, to OXXO in Mexico growing a little bit slower this year, right? Because of the closings. But outside of Mexico, I would say also a little bit slower than in the past, while Bara continues to grow and open stores at a very fast pace. So I wanted to see if maybe, if anything has changed in terms of priorities. Will Bara be maybe a little bit higher on the list, maybe relative to OXXO Brazil? And wanted to see if anything has changed on how you see maybe the growth of OXXO outside of Mexico. Thank you.
Jose Antonio Fernandez Garza (Chief Executive Officer)
No, good question, Alejandro. Thank you. Look, we are— I think there’s different things explaining each of these seemingly looking slowdowns. On the Mexico side, I think we had a calendar delay as we made sure we increased the productivity, or what we call the batting average, of our stores. We started our external maybe a little bit later than what we usually do in other years. That compounded with a pruning of stores. But we remain committed to opening a thousand stores minus the closings of these years.
And looking forward, as we are seeing the evolution of the maturation of our new stores and as we see them bringing significant profit and paying their cost of capital significantly, we remain committed to opening about a thousand net new stores for the foreseeable future in OXXO Mexico. For OXXO International, we are incredibly excited for Colombia. I think Colombia is already where we need it to be, and we need to accelerate expansion as much as we can possibly do without damaging the quality of the stores, which, you know, that’s a number that you have to monitor carefully because if you overstimulate the production factory of stores with incentives, you can get bad-quality outcomes. So you really have to measure very well how you expand and make sure you are developing processes and capabilities.
And that takes time. But Colombia is ready for acceleration. Brazil is still not there and we’ve been very upfront. We see the opportunity in Brazil. I think it’s a huge opportunity that we can achieve. We’re very excited for the São Paulo region. We’re confident that it will grow. But we’re still taking into account, as all the other retailers in Brazil, that we’re going to have a 40-hour work week with two days off. And so as we learn to navigate those operational constraints, we are being much more prudent in how we expand.
But we’re still planning to expand about a store a week or more, maybe 70 stores next year for Brazil, net new stores. That gets me to the Bara question. And with Bara, we are very happy with the maturity of the stores and the expansion in the north of Mexico. We’re seeing an evolution that’s very positive and with still a lot of depth in value propositions to increase. We’re still needing to simplify some of the portfolio. We still need to cover certain categories that Bara does not, that some of our competitors cover. But we are very excited by the enthusiastic attitude that we see in our consumer going into Bara.
The repeat customer is there and they’re beginning to see more and more all of their fulfillment needs for their house satisfied. But we still need to add some value propositions. So that’s why we’re not so worried about, you know, same-store sale expansion for Bara. We see that as a marathon. We need to keep getting the stores better and better to supply the needs of our customers. And as those value propositions get added into the store, we hope we’re going to see several iterations and years of same-store sale expansion in Bara.
So we’re much more focused on accelerating expansion, and we plan to even open more stores next year than what we are opening this year. We promised a store a day and we’re going to probably overdeliver on that. So we’re happy with that.
Alejandro Fuchs (Analyst)
Super clear. Thank you.
Carolini (Operator)
The next question comes from Isabela LeMas with UBS.
Isabela LeMas (Analyst)
Hi, good morning Antonio, Martin, Juan. Thank you for taking my question. We’d like to get a view on capital allocation. So if you could mention how do you see opportunities to divest non-core assets sales now? What about M&A, for instance? What’s your appetite? And last but not least, how should we think about dividends? How do you see overall shareholder returns evolving from now on? Kind of get your thoughts on all these aspects of capital allocation here.
Jose Antonio Fernandez Garza (Chief Executive Officer)
Thank you, Isabella. I’ll let Martin—
Martin Arias (Chief Financial Officer)
Thank you for your question. Again, we tend to try to focus any announcements about what the next stage of capital allocation is to do it in our conference call, first conference call of the year, when we have visibility about our budgets, the final year results, cash flow generation during the year. But it is pretty clear by the end of this year, first quarter of next year, we will have reached our two times net debt to EBITDA target. I suspect we will be somewhere in the 1.5, 1.6 net debt to EBITDA.
So we will have some flexibility and then we’ll have to decide whether that flexibility is returned in terms of, again, some sort of extraordinary dividend or additional buybacks. And we will be announcing that in February, March. But clearly there will be some space that we have available to us to announce an extraordinary dividend and again be opportunistic with regards to buybacks and saving a little bit of gunpowder in case we see a good opportunity to buy our own shares like we did now less than a few months ago. I don’t know if that answers your question and I was just going to—
Jose Antonio Fernandez Garza (Chief Executive Officer)
Add, I mean in terms of the kind of M&A versus shareholder remuneration, I mean as everybody knows we’ve talked in the past about how in the vast majority of our markets our growth is really organic. There’s not really assets to acquire in Mexico or in Brazil or in Colombia. Or, you know, we’ve talked about the US as a place where there are some assets, some of which we’ve looked at. But obviously we’re being very, very disciplined in terms of valuation and expected returns and so continue to kind of reserve that flexibility.
But if you notice, I mean Martin didn’t mention M&A and that should tell you a thing or two about where our minds are.
Isabela LeMas (Analyst)
Yeah, yeah, that’s pretty clear. Thank you. Thank you so much.
Jose Antonio Fernandez Garza (Chief Executive Officer)
Thank you, Isabella.
Carolini (Operator)
The next question comes from Bobby Ford with Bank of America.
Bobby Ford (Analyst)
Hey, good morning everyone. Jose, can you talk a little bit about the magnitude and timeline of logistics investments you need to win in Mexican grocery? Right.
Jose Antonio Fernandez Garza (Chief Executive Officer)
And how should we think about, you know, the assortment and the price points needed to build principality in the category versus the Canastok that’s being tested today? And then you’re also accelerating some growth in Caffenio and I want to get a sense of how you’re thinking about Caffenio. So in terms of investments in capabilities or capex or even training, that’s much more towards our food service capabilities. That comes with investment from our supplier source that is very granular and it varies greatly from a type of SKU.
A lot of training and capability building in our stores and, in the middle of that, all of our distribution. We need cold storage distribution, cold-all capabilities. So that requires much more investment in terms of our— Of our canasta, also we are— Most of our investment is in a lot of discussions with our supplier partners to target presentations that currently are not available. Many are, but we still need to develop a lot of them with our supplier partners that match the gram that our customer demands, the price per gram that our customer demands, the type of packaging that is convenient to carry for our customers. So that requires a lot from our commercial guys and ladies to really develop this offering in our stores.
But once we have that, it’s very easy to develop the store and it’s not a lot of SKUs frankly and it’s not a lot of price changes, so it doesn’t— Inventory is easy, so there’s not a lot of capability building to develop them. We’ve done it before with Los Básicos de la Oro. I think we lost the focus for many years and we’re coming back and we’re very excited for the results. But it’s not going to be so, so heavy in terms of capability building. And Caffenio, we have two businesses. With Caffenio, the Caffenio infrastructure powers our stores and we’re seeing tremendous growth in terms of not only coffee offering but, you know, cappuccinos and all these mixes, and we see huge potential to increase our offering.
We are way above what we were selling in coffee per store last year but way below our potential and below our target. So we have a long way to go. And our other business, which is growing in relevance but still is tiny, is we operate about 300 Caffenio Drive stores. They’re gaining— they’re becoming almost like a cult following. Wherever we open we see big long lines and we see huge potential. We compete against guys that have to pay a lot of franchise fees and we are very happy with that competition, and we’re going to keep opening Caffenio Drives.
I just a compliment on Cafeneo. We were able to buy out our partner in that business that accompanied us for many, many, many years, and it was a great partner, but that has given us the opportunity now that we own 100% to find a significant amount of efficiencies around overhead. Number two, align much better the two organizations of Cafeneo and OXXO. So for example, now we give them incentives on the basis of a completely combined P&L. So everybody, both the Cafeneo and the OXXO, responds for all the total cups sold, for the price of the coffee that we buy, the maintenance of the machines. That, I think, has added a whole new discipline to the business.
And then in the Cafeneo drives, it is really a source of very good and interesting innovation. They’re a much smaller business, much more almost venture capital-like in the way they test and try out new things. The other day they had a pistachio-flavored frappe, and to be honest it was selling, and it was selling very well. And so that their ability to move, and so I think it will also be a source for very interesting innovation to take things to OXXO Mexico and to take things to South America around everything related to coffee, beverages, and even some food because they do have a very interesting food service offering.
Carolini (Operator)
Thank you. Thank you both. The next question comes from Alvaro Garcia with BTG Pactual.
Jose Antonio Fernandez Garza (Chief Executive Officer)
Hola Alvaro.
Alvaro Garcia (Analyst)
Hey Jose, how are you? Martin, Juan, thanks for the space for questions. I think we’ve indirectly spoken about the gross margin investment in the context of ultra traffic, but we haven’t really spoken about it directly. So my question’s on gross margin specifically, and I appreciate the commentary on the tough comp on commercial income and sort of the 70 basis point run rate of investment, but, you know, on things that you can control I guess the questions would be, you know, how do you feel about leaning in even further into next year?
And it would be very helpful to get some color on sort of breaking down that 70 basis points. You know, how much is coffee, how much is affordability in other categories? So we can think about that, think about modeling that going forward. Thank you.
Martin Arias (Chief Financial Officer)
I’d have to get back to you to get into the granular detail of, by category, where we’re seeing it. I know that people don’t—I’ve repeated this in various forums—we don’t manage the business for gross margin, we manage the business for EBITDA. And it’s a little bit trial and error. In other words, what I can give you an assurance is we are relentless in measuring, when we initiate affordability initiatives, to clearly identify what is the total margin breakeven point.
So what do we have to gain in terms of traffic and volume to compensate for any adjustments that we make, either pricing or to package price/package architecture, and there have been instances where the math didn’t work out so we took it back. Number two, we’re changing the nature of the commercial negotiation relationship we have with our suppliers. It used to be significantly more driven by shelf space and, you know, whatever SKU they were, quote unquote, trying to push in any given quarter. And now we’ve added a new layer very focused on what is the value proposition of the consumer. And we will not, or be more disciplined in not, selling shelf space just for the commercial income if we don’t have a very strong conviction that this is what our consumer needs and wants.
And you know what, the suppliers—I haven’t been surprised. I thought that this was going to create greater tension with suppliers, but the suppliers are also seeing it themselves. They’re not particularly interested in also having a slow-moving SKU, because they know eventually we just won’t be buying and we won’t be growing. So many of the suppliers have adapted very quickly to our concerns, therefore allowing us to put in lower-priced brands in categories that historically they would have never seen OXXO as a natural channel for some of these lower-price brands.
They’ve agreed to allow us to remove some of the SKUs and refocus that space, and therefore allowing us to keep that money on products that our consumer wants and needs and makes us more competitive. Very focused on innovation with suppliers, as being the go-to place where new interesting products can be launched in a very efficient manner and where it can provide that sort of wow factor of very, very interesting and attractive offers made to the consumer, which obviously in the traditional trade it’s a little bit harder to do because you have to—it’s hundreds of thousands of stores with very differentiated execution and so on. So I would tell you on the gross margin, we’re going to continue to test and try, and sometimes we’ll get it right, sometimes we’ll get it wrong.
But trust me, at the end of the day, we are very focused on growing our operating income in absolute terms, significant, as much above inflation as we can, by finding the right things between—and Jose said it in the script. If you go back and you take out some of his quotes, it’s many different layers that we have, levers that we have to manage at any given time, but we have a lot of them and we use them all.
Alvaro Garcia (Analyst)
Yeah. Thank you very much.
Jose Antonio Fernandez Garza (Chief Executive Officer)
Thank you, Alvaro.
Carolini (Operator)
The next question comes from Carlos Laboy with HSBC.
Jose Antonio Fernandez Garza (Chief Executive Officer)
Hola, Carlos.
Carolini (Operator)
Carlos, you can open your microphone now, please.
Carlos Laboy (Analyst at HSBC)
Sorry about that. Thank you very much. Jose, Martin. We all know how disciplined you are in terms of avoiding or wanting to avoid dilutive deals, but if we can put that aside just for a moment: when you think about growth opportunities in the highly fragmented U.S. and European C-store markets, what do you think are the biggest attributes that you would bring into this market, and the biggest constraints that you’re facing? Is it really cost of capital and access to capital as constraints, or are there other factors that I’m missing?
Because these are very underdeveloped markets. They’re so highly fragmented still. And yet the skill sets that you’re building keep growing, and the capabilities that you have that fit into these markets look attractive.
Jose Antonio Fernandez Garza (Chief Executive Officer)
Thank you, Carlos. Obviously, we give a lot of thought and vigorous debate in our leadership team and frankly in our board about what are the real crux and essence of what we bring to the table when we go into the U.S. or developed markets like Europe. And in Europe, it’s lost in the numbers of Valora, but if you look at Swiss retail, what we’ve been able to extract on value in terms of food service, bread, and all these things out of Valora into our Latin American operations, and then in terms of commercial income and thinking about commercial income into your Swiss retail, has been tremendous.
Frankly, it pays most of the value that we’ve been able to bring in and bring out of Valora. And we see a very similar opportunity for North American. And frankly, if you get out the gas part of the business, where we probably bring the least, what we’re seeing in our stores in West Texas, where we converted into OXXO and we developed the food service, the Mex-Mex with Dona Tota, we’re seeing very interesting results and we see a lot of upfront investment from Arca or Coca-Cola, from Red Bull, from the tobacco guys.
And so we’re very encouraged by what we are being able to develop. Now, that has to be carried into attractive multiples to acquire. And frankly, we haven’t been able to find opportunity. We’ve looked at very interesting things in Europe that have gone to other players that have been more willing to pay more, and we’ve seen the same thing happen in the U.S. So again, that balance of how much do we believe we can bring value—I am very optimistic that we can—but we still need to be cautious about not overpaying, and we’d rather be seen as overly cautious than as overly reckless.
Martin Arias (Chief Financial Officer)
And I think the other part of that has to do with the, you know, the choice between acquisition and new-to-industry development, right? The organic part of it. Now clearly we haven’t really done too much on either of those, but it’s also part of the internal discussion of how, even as we look at assets, could we accelerate organic growth in a place like Texas, as Russell was saying. And we are pushing the team to begin developing the NTI opportunity in Texas where we’re seeing favorable demographics in the U.S., but it’s still going to be less than a single-digit expansion for next year. And as you know, they’re investments north of 5 or 6 million dollars per store. So it’s a different animal than what we built in Latin America.
Jose Antonio Fernandez Garza (Chief Executive Officer)
And one additional complement: if we were to find the right asset, again given the target size and what we’re finding, what we’re looking for, the reality is if we had a very strong conviction that it provided us with very special capabilities, particularly around having a value proposition, an NTI value proposition that was particularly well poised for rollout, I think we would be willing to be more aggressive in the price that we paid. The problem is when you really get to see these assets and you scratch under the surface, you will find that many people who claim to be doing extraordinarily well in the United States, when you strip out goodwill and you look at the value that is being generated by, let’s just say, the organic operating business, the reality is the returns are not that attractive. So then you’re paying for the expectation that what they have not been able to achieve, you will be able to achieve it over time.
If you were to ask what I think OXXO can bring to the U.S., you would be shocked. If you look at the next numbers of the number of convenience stores in the United States that don’t make money inside the store—I mean, the number is like over 90%. The people who are making money, without a doubt, are the ones that have a very high focus on foodvenience. And everybody else is basically subsidizing the inside store with gasoline. So I do think OXXO can bring a lot of innovation around pricing, promotions.
I think we’re quickly learning around food, and we will emulate and copy many other players, and we will bring that profit component to the inside store sales, which, to be very honest, today, I think a lot of people haven’t managed to figure out. Thank you. Thank you, Carlos.
Carolini (Operator)
The next question comes from Luis Felipe with Citi.
Jose Antonio Fernandez Garza (Chief Executive Officer)
Hola, Luis.
Luis Felipe (Analyst)
Hola. Thank you so much for the space here. Just want a quick one on BARA here. If you look at the beginning of the year, your initial outlook for the format was opening close to 200 stores, if my math is not wrong here, and now you are already past this threshold. So I wanted to understand what has changed in the format. How has it evolved to a point that you have been accelerating so fast the format? Is it store maturation, or do you see any other things influencing here?
Thank you.
Jose Antonio Fernandez Garza (Chief Executive Officer)
So if I remember correctly, one of you told me if I open a store a day, they would toast with champagne. I don’t remember who it was, but I was expecting my champagne bottles delivered. Look, Obviously we come from the convenience store, the proximity store side. And we have been learning a lot by looking at others, by visiting operations all over the world and by bringing talent that have succeeded in this. And we have to unlearn a lot of things from OXXO to develop our discount. And that takes a lot of time. But what does not take a lot of time is building stores that pay their cost of capital. And we tailor that. We target it to a very— We have a very small— How do you— Anyway, we have a very good batting average in our stores.
They are paying their cost of capital and we have a very low standard deviation. And so that gives us enough that when you see that even though the stores lag some of the value propositions that you see, as long as you’re adding value layers every year. And we’re seeing a lot of progress building in our private label infrastructure, building in our supply chain infrastructure, and building in getting out all the SKUs that just bring noise to the system, making a very lean, efficient machine.
And so we are happy with the growth we’re seeing in terms of same-store sales. We like the traffic. Most of that is traffic. Even in some of the quarters it has been negative in terms of ticket. So we are very excited for what’s coming for Bara. We have a long way to go. It’s a, obviously, super competitive market, but it’s also a huge, huge market. There’s room for a lot of people. The traditional trade still plays a very significant role and we see many years of expansion and accelerated expansion.
We play a different name in terms of our positioning of what Bara stands for in the consumer than other players. And we plan to keep playing that game and staying relevant to our consumers. We love the complementarity to OXXO. We see a lot of—if you come to Monterrey, you’ll see a lot of Baras next to OXXO. And while they both sell beer or both sell tobacco, Bara sells much more toilet paper, house-cleaning goods, shampoos and other things that OXXO does not excel at.
So we love this multi-format evolution and we are very excited for the future of Bara going forward.
Martin Arias (Chief Financial Officer)
Let me compliment there. Jose, while he was in charge of PNH, put together a very good team at Bara. A team that for the first time was completely outside of the company. Bara used to be a place where very successful executives at OXXO were sent. Very successful executives from OXXO were sent. And the reality is the chip is a completely different chip. It’s a completely different mindset. So the team that’s there now, the focus that they have brought, the cost, the focus that they have brought to private label, the focus they have brought to how that operating model works is really amazing.
Every other week somebody brings me a new product that they’ve developed and are rolling out in private label, in cookies, in ice creams, in potato chips. And you will be surprised, some of the things that over the next few months and years we will be rolling out that you would have thought would have been unmentionable for Fomento Economico. Number two, what tends to kill the returns of these businesses and get you into trouble is for how long you have to sustain the operating losses as the store matures.
So even if you haven’t reached the point where a mature store within 12, 18, 24 months is making its cost of capital, if it’s already break even at an even level so that at least you’re not continuing to fund losses, that gives you a lot more flexibility to roll it out quicker and then rely on your conviction with regards to new waves of value that you’re going to be developing over time, because you’re not sustaining enormous amounts of operating losses which, again, flow through the P&L and you sort of don’t see them, but they weigh on the amount of money that you’ve had to put into the business.
So in Bara, the speed at which the stores, for example, ramped up without alcohol licenses—because in the north of Mexico it can take you 12 months to 18 months to get your licenses; we see that in OXXO as well—we were very, very surprised how well it was received. So that has given us the confidence that we can roll this out. They can get to break even very quickly. And then as we roll out the new waves of value, particularly around private label and things of that nature, we’re going to give it a try.
Jose Antonio Fernandez Garza (Chief Executive Officer)
And I would just add, I think again, you know, the question came up earlier about the different growth rates for the different OXXO in different countries or Bara. And part of your question touches on the same. So we’ll give you more granular numbers in the next call in February in terms of some of the things that we expect will happen during the year. But in terms of the opening of stores, I would kind of think about four data points. OXXO Mexico: if we open 1,000 stores from a base of basically 25,000 stores, that’s 4% growth in net new stores.
And think about Brazil. Brazil should be in the high single digits. Maybe, if all goes well, we can crack 10%. But let’s think about kind of high single digits for Brazil. Then you go to Colombia, where you will definitely plan to be in the double digits. And then the fourth one is Bara, where it will not only be in the double digits, but probably north of 30%. So those four give you an idea of either there’s a current scale in the case of OXXO Mexico, which is already very, very large, but in the case of the other three, where they are in their development curve, that gives the comfort to step on the gas with more conviction.
And then of those three, without question, I think Bara is number one.
Luis Felipe (Analyst)
Thank you so much, guys. Very comprehensive.
Carolini (Operator)
This concludes the question and answer section. At this time I would like to turn the floor back to Mr. Fonseca for any closing remarks.
Juan Fonseca (Investor Relations Director)
Thanks, everyone. I mean, just as always, make our team available for follow-ups and thank you for joining today, and have a great rest of the week.
Carolini (Operator)
Thank you everyone. This concludes today’s presentation. You may disconnect now and have a nice day.
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