FORM 20-F

ANNUAL REPORT PURSUANT TO SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2011
Commission file number 1-12260

Coca‑Cola FEMSA, S.A.B. de C.V.
(Exact name of registrant as specified in its charter)

Not Applicable
(Translation of registrant’s name into English)

United Mexican States
(Jurisdiction of incorporation or organization)

Guillermo González Camarena No. 600
Centro de Ciudad Santa Fe
01210 México, D.F., México
(Address of principal executive offices)

Securities registered or to be registered pursuant to Section 12(b) of the Act:

Securities registered or to be registered pursuant to Section 12(g) of the Act:

None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:

None

The number of outstanding shares of each class of capital or common stock as of December 31, 2011 was: 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  N/A 

Indicate by check mark whether the registrant:  (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.  (Check one):

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

TABLE OF CONTENTS

INTRODUCTION

References

Unless the context otherwise requires, the terms “Coca-Cola FEMSA,” “our company,” “we,” “us” and “our” are used in this annual report to refer to Coca-Cola FEMSA, S.A.B. de C.V. and its subsidiaries on a consolidated basis.

References herein to “U.S. dollars,” “US$,” “dollars” or “$” are to the lawful currency of the United States of America. References herein to “Mexican pesos” or “Ps.” are to the lawful currency of Mexico.

“Sparkling beverages” as used in this annual report refers to nonalcoholic carbonated beverages.  “Still beverages” refers to nonalcoholic non-carbonated beverages.  Non-flavored waters, whether or not carbonated, are referred to as “waters.”

References to Coca-Cola  trademark beverages in this annual report refer to products described in “Item 4. Information on the Company—The Company—Our Products.”

Currency Translations and Estimates

This annual report contains translations of certain Mexican peso amounts into U.S. dollars at specified rates solely for the convenience of the reader. These translations should not be construed as representations that the Mexican peso amounts actually represent such U.S. dollar amounts or could be converted into U.S. dollars at the rate indicated. Unless otherwise indicated, such U.S. dollar amounts have been translated from Mexican pesos at an exchange rate of Ps. 13.95 to US$ 1.00, the exchange rate for Mexican pesos on December 30, 2011, the last day in 2011 for which information is available, according to the U.S. Federal Reserve Board. On April 20, 2012, this exchange rate was Ps. 13.12 to US$ 1.00. See “Item 3. Key Information—Exchange Rate Information” for information regarding exchange rates since January 1, 2007.

To the extent that estimates are contained in this annual report, we believe such estimates, which are based on internal data, are reliable. Amounts in this annual report are rounded, and the totals may therefore not precisely equal the sum of the numbers presented.

Sources

Certain information contained in this annual report has been computed based upon statistics prepared by the Instituto Nacional de Estadística y Geografía de Mexico (the National Institute of Statistics and Geography), the Federal Reserve Bank of New York, the U.S Federal Reserve Board, the Banco de México (the Central Bank of Mexico), the Comisión Nacional Bancaria y de Valores of Mexico (the National Banking and Securities Commission, or the CNBV), local entities in each country and upon our estimates.

Forward-Looking Information

This annual report contains words such as “believe,” “expect,” “anticipate” and similar expressions that identify forward-looking statements.  Use of these words reflects our views about future events and financial performance. Actual results could differ materially from those projected in these forward-looking statements as a result of various factors that may be beyond our control, including, but not limited to, effects on our company from changes in our relationship with The Coca-Cola Company, movements in the prices of raw materials, competition, significant developments in economic or political conditions in Latin America or changes in our regulatory environment. Accordingly, we caution readers not to place undue reliance on these forward-looking statements. In any event, these statements speak only as of their respective dates, and we undertake no obligation to update or revise any of them, whether as a result of new information, future events or otherwise. 

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Business Divisions

During 2011, we restructured our internal operations in order to have the necessary flexibility to manage our business going forward, extend our track record of growth and better reflect the geographic characteristics of our business. Previously, we managed our business under three divisions—Mexico, Latincentro, and Mercosur. As a result of these changes, we organized our operations into the following two reportable segments: (i) Mexico and Central America division (comprising the following countries: Mexico, Guatemala, Nicaragua, Costa Rica and Panama) and (ii) South America division (comprising the following countries: Brazil, Argentina, Colombia and Venezuela).  However, because Venezuela operates in an economy with exchange control and hyper-inflation, Bulletin B-5 “Information by Segments”, does not allow its aggregation into the South America segment for purposes of our consolidated financial statements. See “Item 4. Information on the Company—The Company—Business Strategy.”

Item 1.  Not Applicable

Item 2.  Not Applicable

Item 3.  Key Information

SELECTED CONSOLIDATED FINANCIAL DATA 

This annual report includes (under Item 18) our audited consolidated balance sheets as of December 31, 2011 and 2010 and the related consolidated statements of income and changes in shareholders’ equity and cash flows for the years ended December 31, 2011, 2010, and 2009. Our consolidated financial statements for those years were prepared in accordance with Mexican Financial Reporting Standards, which we sometimes refer to as Mexican FRS. Mexican FRS differs in certain significant respects from generally accepted accounting principles in the United States, or U.S. GAAP. Notes 26 and 27 to our consolidated financial statements provide a description of the principal differences between Mexican Financial Reporting Standards and U.S. GAAP as they relate to us, together with reconciliation to U.S. GAAP of net income and shareholders’ equity.

Beginning in 2012, Mexican issuers with securities registered in the National Securities Registry (Registro Nacional de Valores) of the Comisión Nacional Bancaria y de Valores (Mexican National Banking and Securities Commission, or the CNBV) are required to prepare financial statements in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board, which we refer to as IFRS.  Accordingly, as of January 1, 2012, we are preparing our financial information in accordance with IFRS on a comparable basis.  See Note 28 to our audited consolidated financial statements.

Through December 31, 2007, Mexican FRS required us to recognize effects of inflation in our financial statements and re-express financial statements from prior periods in constant pesos as of the end of the most recent period presented. For periods beginning in 2008, we adopted Norma de Información Financiera (NIF) B-10 “Effects of Inflation” under Mexican Financial Reporting Standards.  Under this rule, the previous inflation accounting rules requiring us to re-express prior years to reflect the impact of current period inflation no longer apply, unless the economic environment in which we operate qualifies as inflationary pursuant to Mexican Financial Reporting Standards. An economic environment is inflationary if the cumulative inflation equals or exceeds an aggregate of 26% over the preceding three consecutive years. As a result, we ceased to recognize the effects of inflation on our financial information for our subsidiaries in Mexico, Guatemala, Panama, Colombia and Brazil. For the rest of our subsidiaries in Argentina, Venezuela, Costa Rica and Nicaragua, we continue,as of December 31, 2011, applying inflationary accounting in accordance with Mexican Financial Reporting Standards.

Pursuant to Mexican FRS, the information presented in this annual report presents financial information for 2011, 2010, and 2009 in nominal terms that has been presented in Mexican pesos, taking into account local inflation of each inflationary economic environment and converting from local currency to Mexican pesos using the official exchange rate at the end of the period published by the local central bank of each country categorized as an inflationary economic environment. For each non-inflationary economic environment, local currency is converted to Mexican pesos using the year-end exchange rate for assets and liabilities, the historical exchange rate for shareholders’ equity and the average exchange rate for the income statement. Our financial information for 2007 is expressed in constant pesos as of December 31, 2007.

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Pursuant to Mexican FRS, in our consolidated financial statements and the selected financial information set forth below:

·         In inflationary economic environments, the figures are restated for inflation based on the local consumer price index.

·         In inflationary economic environments, gains and losses in purchasing power from holding monetary liabilities or assets are recognized in the “Comprehensive financing result” line in the income statement.

·         Financial statements for 2011, 2010, and 2009 are stated in nominal Mexican pesos.

·         Beginning in 2008, as a result of discontinuing inflationary accounting for subsidiaries that operate in non-inflationary economic environments, the financial statements are no longer considered to be presented in a reporting currency that comprehensively includes the effects of price level changes; therefore, the inflationary effects of inflationary economic environments arising in 2011, 2010, 2009 and 2008 result in a difference to be reconciled for U.S. GAAP purposes.  See Notes 26 and 27 to our consolidated financial statements.

Our non-Mexican subsidiaries maintain their accounting records in the currency and in accordance with accounting principles generally accepted in the country where they are located. For presentation in our consolidated financial statements, we adjust these accounting records into Mexican Financial Reporting Standards and reported in Mexican pesos under these standards.

The following table presents selected financial information of our company. This information should be read in conjunction with, and is qualified in its entirety by reference to, our audited consolidated financial statements, including the notes thereto.  The selected financial information contained herein is presented on a consolidated basis, and is not necessarily indicative of our financial position or results from operations at or for any future date or period.  See Note 4 to our consolidated financial statements for our significant accounting policies.

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DIVIDENDS AND DIVIDEND POLICY

The following table sets forth the nominal amount in Mexican pesos of dividends declared and paid per share each year and the U.S. dollar amounts on a per share basis actually paid to holders of American Depositary Shares, which we refer to as ADSs, on each of the respective payment dates.

(1)                 Expressed in U.S. dollars using the exchange rate applicable when the dividend was paid.

(2)                 Estimated payment date since dividends for 2011 have not been paid at the time of this annual report.

(3)                 Since dividends for 2011 have not been paid at the time of this annual report, the U.S. dollar per share amount has not been determined.

The declaration, amount and payment of dividends are subject to approval by a simple majority of the shareholders up to an amount equivalent to 20% of the preceding years’ retained earnings and by a majority of shareholders of each of Series A and Series D shares voting together as a single class above 20% of the preceding years’ retained earnings, generally upon the recommendation of our board of directors, and will depend upon our operating results, financial condition, capital requirements, general business conditions and the requirements of Mexican law.  Accordingly, our historical dividend payments are not necessarily indicative of future dividends.

Holders of Series L shares, including in the form of ADSs, are not entitled to vote on the declaration and payments of dividends.

5

EXCHANGE RATE INFORMATION

The following table sets forth, for the periods indicated, the high, low, average and period-end exchange rate expressed in Mexican pesos per U.S. dollar.

Source:  U.S. Federal Reserve Board.

(1)     Average month-end rates.

Source:  U.S. Federal Reserve Board.

On April 20, 2012, the exchange rate was Ps. 13.12 to US$ 1.00, according to the U.S. Federal Reserve Board.

We pay all cash dividends in Mexican pesos.  As a result, exchange rate fluctuations will affect the U.S. dollar amounts received by holders of our ADSs, which represent ten Series L shares, on conversion by the depositary for our ADSs of cash dividends on the shares represented by such ADSs.  In addition, fluctuations in the exchange rate between the Mexican peso and the U.S. dollar would affect the market price of our ADSs. 

6

RISK FACTORS

Risks Related to Our Company

Our business depends on our relationship with The Coca-Cola Company, and changes in this relationship may adversely affect our results from operations and financial condition.

Substantially all of our sales are derived from sales of Coca-Cola trademark beverages.  We produce, market and distribute Coca-Cola trademark beverages through standard bottler agreements in certain territories in Mexico and Latin America, which we refer to as “our territories.”  See “Item 4. Information on the Company—The Company—Our Territories.”  Through its rights under our bottler agreements and as a large shareholder, The Coca-Cola Company has the right to participate in the process for making important decisions related to our business.

The Coca-Cola Company may unilaterally set the price for its concentrate.  In addition, under our bottler agreements, we are prohibited from bottling or distributing any other beverages without The Coca-Cola Company’s authorization or consent, and we may not transfer control of the bottler rights of any of our territories without consent of The Coca-Cola Company.

The Coca-Cola Company also makes significant contributions to our marketing expenses, although it is not required to contribute a particular amount.  Accordingly, The Coca-Cola Company may discontinue or reduce such contributions at any time.   

We depend on The Coca-Cola Company to renew our bottler agreements.  As of December 31, 2011, we had seven bottler agreements in Mexico, with each one corresponding to a different territory: (i) the agreements for Mexico´s Valley territory expires in June 2013 and April 2016, (ii) the agreements for the Central territory expires in May 2015 and July 2016 . (iii) the agreement for the Northeast territory expires in September 2014, (iv) the agreement for the Bajio territory expires in May 2015, and (v) the agreement for the Southeast territory expires in June 2013. Our bottler agreements with The Coca-Cola Company will expire for our territories in other countries as follows:  Argentina in September 2014; Brazil in April 2014; Colombia in June 2014; Venezuela in August 2016; Guatemala in March 2015; Costa Rica in September 2017; Nicaragua in May 2016; and Panama in November 2014.  All of our bottler agreements are automatically renewable for ten-year terms, subject to the right of either party to give prior notice that it does not wish to renew a specific agreement.  In addition, these agreements generally may be terminated in the case of material breach.  See “Item 4. Information on the Company—Bottler Agreements.”  Termination would prevent us from selling Coca-Cola  trademark beverages in the affected territory and would have an adverse effect on our business, financial conditions, results from operations and prospects.  

The Coca-Cola Company and FEMSA have substantial influence on the conduct of our business, which may result in us taking actions contrary to the interests of our remaining shareholders.

The Coca-Cola Company and Fomento Económico Mexicano, S.A.B. de C.V., which we refer to as FEMSA, have substantial influence on the conduct of our business.  As of April 20, 2012, The Coca-Cola Company indirectly owns 29.4% of our outstanding capital stock, representing 37.0% of our capital stock with full voting rights.  The Coca-Cola Company is entitled to appoint five of our maximum of 21 directors and the vote of at least two of them is required to approve certain actions by our board of directors. As of April 20, 2012, FEMSA indirectly owns 50.0% of our outstanding capital stock, representing 63.0% of our capital stock with full voting rights.  FEMSA is entitled to appoint 13 of our maximum of 21 directors and all of our executive officers.  The Coca-Cola Company and FEMSA together, or only FEMSA in certain circumstances, have the power to determine the outcome of all actions requiring approval by our board of directors, and FEMSA and The Coca-Cola Company together, or only FEMSA in certain circumstances, have the power to determine the outcome of all actions requiring approval of our shareholders.  See “Item 7.  Major Shareholders and Related Party Transactions—Major Shareholders—The Shareholders Agreement.”  The interests of The Coca-Cola Company and FEMSA may be different from the interests of our remaining shareholders, which may result in us taking actions contrary to the interests of our remaining shareholders.

7

We have significant transactions with affiliates, particularly The Coca-Cola Company and FEMSA, which may create the potential for conflicts of interest and could result in less favorable terms to us.

We engage in transactions with subsidiaries of both The Coca-Cola Company and FEMSA.  Our main transactions with FEMSA include supply agreements under which we purchase certain supplies and equipment, a service agreement under which a FEMSA subsidiary transports finished products from our production facilities to distribution facilities in Mexico, sales of finished products to Oxxo, a Mexican convenience store chain owned by FEMSA, a service agreement under which a FEMSA subsidiary provides administrative services to us, and sales and distribution agreements with Cervejarias Kaiser Brasil S.A., or Cervejarias Kaiser.  We continue to distribute and sell the Kaiser  beer portfolio in our Brazilian territories through the 20-year term, consistent with arrangements in place with Cervejarias Kaiser since 2006, prior to the acquisition of Cervejarias Kaiser, a subsidiary of the Heineken Group, by Cuauhtémoc Moctezuma Holding, S.A. de C.V., formerly known as FEMSA Cerveza, S.A. de C.V. or FEMSA Cerveza. On April 30, 2010, the transaction pursuant to which FEMSA agreed to exchange 100% of its beer operations for a 20% economic interest in the Heineken Group closed. See “Item 4.  Information on the Company—The Company—Product and Packaging Mix—South America, excluding Venezuela (Colombia, Brazil and Argentina).”  In addition, we have entered into cooperative marketing arrangements with The Coca-Cola Company.  We are a party to a number of bottler agreements with The Coca-Cola Company.  We also have agreed to develop still beverages and waters in our territories with The Coca-Cola Company and have entered into agreements to acquire companies with The Coca-Cola Company.  See “Item 7.  Major Shareholders and Related Party Transactions—Related Party Transactions.”

Our transactions with related parties may create the potential for conflicts of interest, which could result in terms less favorable to us than could be obtained from an unaffiliated third party.

Competition could adversely affect our financial performance.

The beverage industry in the territories in which we operate is highly competitive.  We face competition from other bottlers of sparkling beverages such as Pepsi  products, and from producers of low cost beverages or “B brands.”  We also compete in different beverage categories, other than sparkling beverages, such as water, juice-based beverages, teas, sport drinks and value-added dairy products.  Although competitive conditions are different in each of our territories, we compete principally in terms of price, packaging, consumer sales promotions, customer service and product innovation.  See “Item 4.  Information on the Company—The Company—Competition.”  There can be no assurances that we will be able to avoid lower pricing as a result of competitive pressure.  Lower pricing, changes made in response to competition and changes in consumer preferences may have an adverse effect on our financial performance.

Changes in consumer preference could reduce demand for some of our products.

The non-alcoholic beverage industry is rapidly evolving as a result of, among other things, changes in consumer preferences.  Specifically, consumers are becoming increasingly more aware of and concerned about environmental and health issues.  Concerns over the environmental impact of plastic may reduce the consumption of our products sold in plastic bottles or result in additional taxes that would adversely affect consumer demand.  In addition, researchers, health advocates and dietary guidelines are encouraging consumers to reduce their consumption of certain types of beverages sweetened with sugar and High Fructose Corn Syrup (“HFCS”), which could reduce demand for certain of our products.  A reduction in consumer demand would adversely affect our results from operations. 

Water shortages or any failure to maintain existing concessions could adversely affect our business.

Water is an essential component of all of our products.  We obtain water from various sources in our territories, including springs, wells, rivers and municipal and state water companies pursuant to either contracts to obtain water or pursuant to concessions granted by governments in our various territories. 

We obtain the vast majority of the water used in our production pursuant to concessions to exploit wells, which are generally granted based on studies of the existing and projected groundwater supply.  Our existing water concessions or contracts to obtain water may be terminated by governmental authorities under certain circumstances and their renewal depends on receiving necessary authorizations from local and/or federal water authorities.  See “Item 4.  Information on the Company—Regulation—Water Supply Law.”  In some of our other territories, our existing water supply may not be sufficient to meet our future production needs, and the available water supply may be adversely affected by shortages or changes in governmental regulations and environmental changes.

8

We cannot assure you that water will be available in sufficient quantities to meet our future production needs or will prove sufficient to meet our water supply needs.

Increases in the prices of raw materials would increase our cost of goods sold and may adversely affect our results from operations.

In addition to water, our most significant raw materials are (1) concentrate, which we acquire from affiliates of The Coca-Cola Company, (2) packaging materials and (3) sweeteners.  Prices for sparkling beverages concentrate are determined by The Coca-Cola Company as a percentage of the weighted average retail price in local currency, net of applicable taxes.  In 2005, The Coca-Cola Company decided to gradually increase concentrate prices for sparkling beverages in Brazil and Mexico. These increases were fully implemented in Brazil in 2008 and in Mexico in 2009.  However, we may experience further increases in our territories in the future.  The prices for our remaining raw materials are driven by market prices and local availability as well as the imposition of import duties and import restrictions and fluctuations in exchange rates.  We are also required to meet all of our supply needs from suppliers approved by The Coca-Cola Company, which may limit the number of suppliers available to us.  Our sales prices are denominated in the local currency in each country in which we operate, while the prices of certain materials, including those used in the bottling of our products, mainly resin, ingots to make plastic bottles, finished plastic bottles, aluminum cans and HFCS, are paid in or determined with reference to the U.S. dollar, and therefore may increase if the U.S. dollar appreciates against the currency of the countries in which we operate, as was the case in 2008 and 2009.  While the U.S. dollar did not appreciate against the currency of the countries in which we operate in 2010 and most of 2011, we cannot assure you that an appreciation of the U.S. dollar with respect to such currencies will not occur in the future.  See “Item 4.  Information on the Company—The Company—Raw Materials.”  

Our most significant packaging raw material costs arise from the purchase of resin and plastic ingots to make plastic bottles and from the purchase of finished plastic bottles, the prices of which are tied to crude oil prices and global resin supply.  The average prices that we paid for resin and plastic ingots in U.S. dollars increased significantly in 2011, as compared to 2010.  We cannot provide any assurance that prices will not increase further in future periods.  Average sweetener prices, including sugar and HFCS, paid during 2011 were higher as compared to 2010 in all of the countries in which we operate.  During 2009 to 2011 international sugar prices were volatile due to various factors, including shifting demands, availability and climate issues affecting production and distribution.  Sugar prices in all of the countries in which we operate other than Brazil are subject to local regulations and other barriers to market entry that cause us to pay in excess of international market prices for sugar.  See “Item 4.  Information on the Company—The Company—Raw Materials.”  We cannot assure you that our raw material prices will not further increase in the future.  Increases in the prices of raw materials would increase our cost of goods sold and adversely affect our financial performance.

Taxes could adversely affect our business.

The countries in which we operate may adopt new tax laws or modify existing law to increase taxes applicable to our business.  For example, in Mexico, a general tax reform became effective on January 1, 2010, pursuant to which, as applicable to us, there is a temporary increase in the income tax rate from 28% to 30% from 2010 through 2012.  This increase will be followed by a reduction to 29% for the year 2013 and a further reduction in 2014 to return to the previous rate of 28%.  In addition, the value added tax (VAT) rate increased in 2010 from 15% to 16%.  This increase had an impact on our results from operations due to the reduction in disposable income of consumers.

In Panama there was an increase in a certain consumer tax, effective as of April 1, 2010, affecting syrups, powders and concentrate.  Some of these materials are used for the production of our sparkling beverages.  These taxes increased from 6% to 10%.

Our products are also subject to certain taxes in many of the countries in which we operate. Certain countries in Central America, Brazil and Argentina also impose taxes on sparkling beverages.  See “Item 4.  Information on the Company—Regulation—Taxation of Sparkling Beverages.”  We cannot assure you that any governmental authority in any country where we operate will not impose new taxes or increase taxes on our products in the future.  The imposition of new taxes or increases in taxes on our products may have a material adverse effect on our business, financial condition, prospects and results from operations.

9

Regulatory developments may adversely affect our business.

We are subject to regulation in each of the territories in which we operate.  The principal areas in which we are subject to regulation are environment, labor, taxation, health and antitrust.  Regulation can also affect our ability to set prices for our products.  See “Item 4.  Information on the Company—Regulation.”  The adoption of new laws or regulations or a stricter interpretation or enforcement thereof in the countries in which we operate may increase our operating costs or impose restrictions on our operations which, in turn, may adversely affect our financial condition, business and results from operations.  In particular, environmental standards are becoming more stringent in several of the countries in which we operate, and we are in the process of complying with these standards, although we cannot assure you that we will be able to meet any timelines for compliance established by the relevant regulatory authorities.  See “Item 4.  Information on the Company—Regulation—Environmental Matters.”  Further changes in current regulations may result in an increase in compliance costs, which may have an adverse effect on our future results from operations or financial condition.

Voluntary price restraints or statutory price controls have been imposed historically in several of the countries in which we operate.  We are currently subject to price controls in Argentina and Venezuela.  The imposition of these restrictions or voluntary price restraints in other territories may have an adverse effect on our results from operations and financial position.  See “Item 4.  Information on the Company—Regulation—Price Controls.”  We cannot assure you that governmental authorities in any country where we operate will not impose statutory price controls or that we will need to implement voluntary price restraints in the future.

In January 2010, the Venezuelan government amended the Ley para la Defensa y Acceso a las Personas a los Bienes y Servicios (Access to Goods and Services Defense Law).  Any violation by a company that produces, distributes and sells goods and services could lead to fines, penalties or the confiscation of the assets used to produce, distribute and sell these goods without compensation.  Although we believe we are in compliance with this law, consumer protection laws in Venezuela are subject to continuing review and changes, and any such changes could lead to an adverse impact on us.

In July 2011 the Venezuelan government passed the Ley de Costos y Precios Justos (Fair Costs and Prices Law). The purpose of this law is to establish the regulations and administrative processes necessary to maintain the price stability of, and equal access to, goods and services. The law also creates the National Ministry of Costs and Prices, whose main role is to oversee price controls and set maximum retail prices on certain consumer goods and services. Of our products, only certain of our still water beverages were affected by these regulations, which mandated to lower our sale prices as of April 2012.  Any failure to comply with this law would result in fines, temporary suspension or the closure of operations. While we are currently in compliance with this law, we cannot assure you that the Venezuelan government’s future regulation of goods and services will not result in a forced reduction of prices in other of our products, which could have a negative effect on our results of operations.

In January 2012, the Costa Rican government approved a decree which regulates the sale of food and beverages in schools. The decree came into effect in 2012.  Enforcement of this law will be gradual, from 2012 to 2014, depending on the specific characteristics of the food and beverage in question. According to the decree, the sale of specific sparkling beverages and still beverages that contain sugar, syrup or HFCS in any type of presentation in schools is prohibited. We will still be allowed to sell water and certain still beverages in schools. We cannot assure you that the Costa Rican government will not further restrict sales of other of our products in schools in the future; any such further restrictions could lead to an adverse impact on our results of operations.

Our operations have from time to time been subject to investigations and proceedings by antitrust authorities and litigation relating to alleged anticompetitive practices. We have also been subject to investigations and proceedings on environmental and labor matters. We cannot assure you that these investigations and proceedings could not have an adverse effect on our results from operations or financial condition. See “Item 8.  Financial Information—Legal Proceedings.” 

10

Weather conditions may adversely affect our results from operations.

Lower temperatures and higher rainfall may negatively impact consumer patterns, which may result in lower per capita consumption of our beverage offerings. Additionally, adverse weather conditions may affect road infrastructure in the territories in which we operate and limit our ability to sell and distribute our products, thus affecting our results from operations. As was the case in most of our territories in 2011, adverse weather conditions affected our sales in certain regions of these territories.

Risks Related to the Series L shares and the ADSs

Holders of our Series L shares have limited voting rights.

Holders of our Series L shares are entitled to vote only in certain circumstances. In general terms they may elect up to three of our maximum of 21 directors and are only entitled to vote on specific matters, including certain changes in our corporate form, mergers involving our company when our company is the merged entity or when the principal corporate purpose of the merged entity is not related to the corporate purpose of our company, the cancellation of the registration of our shares on the Mexican Stock Exchange or any other foreign stock exchange, and those matters for which the Ley de Mercado de Valores (Mexican Securities Market Law) expressly allows them to vote. As a result, Series L shareholders will not be able to influence our business or operations. See “Item 7. Major Shareholders and Related Party Transactions—Major Shareholders” and “Item 10. Additional Information—Bylaws—Voting Rights, Transfer Restrictions and Certain Minority Rights.”

Holders of ADSs may not be able to vote at our shareholder meetings.

Our shares are traded on the New York Stock Exchange (NYSE) in the form of ADSs. Holders of our shares in the form of ADSs may not receive notice of shareholders meetings from our ADS depositary in sufficient time to enable such holders to return voting instructions to the ADS depositary in a timely manner.

The protections afforded to non-controlling interest shareholders in Mexico are different from those afforded to minority shareholders in the United States and investors may experience difficulties in enforcing civil liabilities against us or our directors, officers and controlling persons.

Under the Mexican Securities Market Law, the protections afforded to non-controlling interest shareholders are different from, and may be less than, those afforded to minority shareholders in the United States. Therefore, it may be more difficult for non-controlling interest shareholders to enforce their rights against us, our directors or our controlling interest shareholders than it would be for minority shareholders of a United States company.

In addition, we are organized under the laws of Mexico, and most of our directors, officers and controlling persons reside outside the United States, and all or a substantial portion of our assets and the assets of our directors, officers and controlling persons are located outside the United States. As a result, it may not be possible for investors to effect service of process within the United States on such persons or to enforce judgments against them, including in any action based on civil liabilities under the U.S. federal securities laws.

The enforceability against our directors, officers and controlling persons in Mexico in actions for enforcement of judgments of U.S. courts, and liabilities predicated solely upon the U.S. federal securities laws will be subject to certain requirements provided for in the Mexican Federal Civil Procedure Code and any applicable treaties. Some of the requirements may include personal service of process and that the judgments of U.S. courts are not against Mexican public policy. The Mexican Securities Market Law, which is considered Mexican public policy, provides that in the event of actions derived from any breach of the duty of care and the duty of loyalty against our directors and officers, any remedy would be exclusively for the benefit of the company. Therefore, investors would not be directly entitled to any remedies under such actions.

11

Developments in other countries may adversely affect the market for our securities.

The market value of securities of Mexican companies is, to varying degrees, influenced by economic and securities market conditions in other countries. Although economic conditions are different in each country, investors’ reaction to developments in one country can have effects on the securities of issuers in other countries, including Mexico. We cannot assure you that events elsewhere, will not adversely affect the market value of our securities.

Holders of Series L shares in the United States and holders of ADSs may not be able to participate in any capital offering and as a result may be subject to dilution of their equity interests.

Under applicable Mexican law, if we issue new shares for cash as a part of a capital increase, other than in connection with a public offering of newly issued shares or treasury stock, we are generally required to grant our shareholders the right to purchase a sufficient number of shares to maintain their existing ownership percentage.  Rights to purchase shares in these circumstances are known as preemptive rights. By law, we may not allow holders of our shares or ADSs who are located in the United States to exercise any preemptive rights in any future capital increases unless (1) we file a registration statement with the United States Securities and Exchange Commission, or SEC, with respect to that future issuance of shares or (2) the offering qualifies for an exemption from the registration requirements of the U.S. Securities Act of 1933, as amended. At the time of any future capital increase, we will evaluate the costs and potential liabilities associated with filing a registration statement with the SEC, as well as the benefits of preemptive rights to holders of our shares in the form of ADSs in the United States and any other factors that we consider important in determining whether to file a registration statement.

We may decide not to file a registration statement with the SEC to allow holders of our shares or ADSs who are located in the United States to participate in a preemptive rights offering. In addition, under current Mexican law, the sale by the ADS depositary of preemptive rights and the distribution of the proceeds from such sales to the holders of our shares in the form of ADSs is not possible. As a result, the equity interest of holders of our shares in the form of ADSs would be diluted proportionately. See “Item 10. Additional Information—Bylaws—Preemptive Rights.”

Risks Related to Mexico and the Other Countries in Which We Operate

Adverse economic conditions in Mexico may adversely affect our financial condition and results from operations.

We are a Mexican corporation, and our Mexican operations are our single most important geographic territory.  For the year ended December 31, 2011, 35.7% of our total revenues were attributable to Mexico.  The Mexican economy continues to be heavily influenced by the U.S. economy, and therefore, deterioration in economic conditions in the U.S. economy may affect the Mexican economy.  Prolonged periods of weak economic conditions in Mexico may have, and in the past have had, a negative effect on our company and a material adverse effect on our results from operations and financial condition.

Our business may be significantly affected by the general condition of the Mexican economy, or by the rate of inflation and interest rates in Mexico and exchange rates for the Mexican peso.  Decreases in the growth rate of the Mexican economy, periods of negative growth and/or increases in inflation or interest rates may result in lower demand for our products, lower real pricing of our products or a shift to lower margin products.  See “Item 11. Quantitative and Qualitative Disclosures about Market Risk.”  In addition, an increase in interest rates in Mexico would increase the cost to us of variable rate, Mexican peso-denominated funding, which constituted approximately 24.5% of our total debt as of December 31, 2011, and have an adverse effect on our financial position.  See “Item 5. Operating and Financial Review and Prospects—Liquidity and Capital Resources.”

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Depreciation of the Mexican peso relative to the U.S. dollar could adversely affect our financial condition and results from operations.

Depreciation of the Mexican peso relative to the U.S. dollar increases the cost to us of some of the raw materials we acquire, the price of which is paid in or determined with reference to U.S. dollars, and of our debt obligations denominated in U.S. dollars and thereby may negatively affect our results from operations, financial position and shareholders’ equity.  Significant fluctuation of the Mexican peso relative to the U.S. dollar occurred in the past, for example, at the end of 2008 and into 2009; and occurred again at the end of 2011, negatively affecting our results.  According to the U.S. Federal Reserve Board, the exchange rate registered a low of Ps. 9.92 to US$ 1.00 at August 5, 2008, and a high of Ps. 15.41 to US$ 1.00 at March 2, 2009 in that period.  At December 31, 2011, the exchange rate was Ps. 13.95 to U.S.$ 1.00.  At April 20, 2012, the exchange rate was Ps. 13.12 to US$ 1.00.  See “Item 3.  Key Information—Exchange Rate Information” and “Item 11.  Quantitative and Qualitative Disclosures about Market Risk—Foreign Currency Exchange Rate Risk.”  

We selectively hedge our exposure to the U.S. dollar with respect to the Mexican peso and other currencies, our U.S. dollar-denominated debt obligations, and recently, the purchase of certain U.S. dollar-denominated raw materials.  A severe depreciation of the Mexican peso or any currency of the countries in which we operate, may also result in disruption of the international foreign exchange markets and may limit our ability to transfer or to convert Mexican pesos into U.S. dollars and other currencies for the purpose of making timely payments of interest and principal on our U.S. dollar-denominated indebtedness or obligations in other currencies. While the Mexican government does not currently restrict, and since 1982 has not restricted, the right or ability of Mexican or foreign persons or entities to convert Mexican pesos into U.S. dollars or to transfer other currencies out of Mexico, the Mexican government could institute restrictive exchange rate policies in the future.  Currency fluctuations may have an adverse effect on our results from operations, financial condition and cash flows in future periods.

Political events in Mexico could adversely affect our operations.

Mexican political events may significantly affect our operations.  Mexico’s next president to be elected in July 2012 may implement significant changes in laws, public policy and/or regulations that could affect Mexico’s political and economic situation, which could adversely affect our business.  We cannot assure you that we will continue to operate under the same policies applicable to us after the Mexican federal elections in 2012.

Political events in Mexico, including events related to Mexico’s 2012 federal elections for a new President and Congress, may significantly affect Mexican economic policy and, consequently, our operations.  Political disagreements between the executive and the legislative branches could result in deadlock and prevent the timely implementation of political and economic reforms, which in turn could have a material adverse effect on Mexican economic policy.  The political environment involving Mexico’s 2012 federal elections or otherwise, could have a negative effect on the Mexican economy, which in turn could result in an adverse effect on our business.  We cannot provide any assurances that political developments in Mexico, over which we have no control, will not have an adverse effect on our business, financial condition or results from operations.

Economic and political conditions in the other Latin American countries in which we operate may increasingly adversely affect our business.  

In addition to Mexico, we conduct operations in Guatemala, Nicaragua, Costa Rica, Panama, Colombia, Venezuela, Brazil and Argentina.  Total revenues and income from our combined non-Mexican operations increased as a percentage of our consolidated total revenues and income from operations from 47.4% and 32.4%, respectively, in 2006, to 64.3% and 62.0%, respectively, in 2011.  As a consequence, our results have been increasingly affected by the economic and political conditions in the countries, other than Mexico, where we conduct operations.

Consumer demand, preferences, real prices and the costs of raw materials are heavily influenced by macroeconomic and political conditions in the other countries in which we operate.  These conditions vary by country and may not be correlated to conditions in our Mexican operations.  In Venezuela we continue to face exchange rate risk as well as scarcity of and restrictions to import raw materials.  Deterioration in economic and political conditions in any of these countries would have an adverse effect on our financial position and results from operations.

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Venezuelan political events may affect our operations.  The political uncertainty involving Venezuela’s October 2012 elections or otherwise could have a negative effect on the Venezuelan economy, which in turn could result in an adverse effect on our business.  We cannot provide any assurances that political developments in Venezuela, over which we have no control, will not have an adverse effect on our business, financial condition or results from operations.

Depreciation of the local currencies of the countries in which we operate against the U.S. dollar may increase our operating costs.  We have also operated under exchange controls in Venezuela since 2003 that limit our ability to remit dividends abroad or make payments other than in local currencies and that may increase the real price paid for raw materials and services purchased in local currency.  In January 2010, the Venezuelan government announced a devaluation of its official exchange rate and the establishment of a multiple exchange rate system which was set at 2.60 bolivars to US$ 1.00 for high priority categories and 4.30 bolivars to US$ 1.00 for non-priority categories, and which recognized the existence of other exchange rates in which the government will intervene. In December 2010, the Venezuelan government announced its decision to implement a new singular fixed exchange rate of 4.30 bolivars to US$ 1.00, which resulted in a devaluation of the bolivar against the U.S. dollar.  For further information, please see Note 3 to our consolidated financial statements.  Future changes in the Venezuelan exchange control regime, and future currency devaluations or the imposition of exchange controls in any of the countries in which we have operations could have an adverse effect on our financial position and results from operations.

In addition, presidential elections were held in November 2011 in each of Guatemala and Nicaragua.   The elections in Guatemala led to the election of a new President and political party (the Patriotic Party (Partido Patriota)).  The elections in Nicaragua led to the reelection of José Daniel Ortega Saavedra, a member of the Sandinista National Liberation Front (Partido Frente Sandinista de Liberación Nacional).  We cannot assure you that the elected presidents will continue to apply the same policies that have been applied to us in the past.

We cannot assure you those political or social developments in any of the countries in which we have operations, over which we have no control, will not have a corresponding adverse effect on the economic situation and on our business, financial condition or results from operations.

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Item 4.  Information on the Company

THE COMPANY

Overview

We are the largest franchise bottler of Coca-Cola trademark beverages in the world.  We operate in territories in the following countries:

·         Mexico – a substantial portion of central Mexico (including Mexico City and the states of Michoacán and Guanajuato) and the southeast and northeast of Mexico (including the Gulf region).

·         Central America – Guatemala (Guatemala City and surrounding areas), Nicaragua (nationwide), Costa Rica (nationwide) and Panama (nationwide).

·         Colombia – most of the country.

·         Venezuela – nationwide.

·         Brazil – the area of greater São Paulo, Campinas, Santos, the state of Mato Grosso do Sul, part of the state of Minas Gerais and part of the state of Goiás.

·         Argentina – Buenos Aires and surrounding areas.

Our company was organized on October 30, 1991 as a sociedad anónima de capital variable (a variable capital stock corporation) under the laws of Mexico with duration of 99 years.  On December 5, 2006, as required by amendments to the Mexican Securities Market Law, we became a sociedad anónima bursátil de capital variable (a listed variable capital stock corporation).  Our legal name is Coca-Cola FEMSA, S.A.B. de C.V.  Our principal executive offices are located at Guillermo González Camarena No. 600, Col. Centro de Ciudad Santa Fe, Delegación Álvaro Obregón, México, D.F., 01210, México.  Our telephone number at this location is (52-55) 5081-5100.  Our website is www.coca-colafemsa.com.

The following is an overview of our operations by reporting segment in 2011.

Operations by Reporting Segment—Overview
Year Ended December 31, 2011⁽¹⁾

(1)       Expressed in millions of Mexican pesos, except for percentages.

(2)      Includes Mexico, Guatemala, Nicaragua, Costa Rica and Panama. Includes results of Grupo Tampico from October 2011 and Grupo CIMSA from December 2011.  

(3)      Includes Colombia, Brazil and Argentina. 

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Corporate History

We are a subsidiary of FEMSA, which also owns Oxxo, the largest Mexican convenience store chain, and which formerly owned FEMSA Cerveza, now Cuauhtémoc Moctezuma Holding, S.A. de C.V., a brewer with operations in Mexico and Brazil, currently a wholly-owned subsidiary of the Heineken Group.  On April 30, 2010, the transaction pursuant to which FEMSA agreed to exchange 100% of its beer operations for a 20% economic interest in the Heineken Group closed.

In 1979, a subsidiary of FEMSA acquired certain sparkling beverage bottlers that are now a part of our company.  At that time, the acquired bottlers had 13 Mexican distribution centers operating 701 distribution routes, and their production capacity was 83 million physical cases.  In 1991, FEMSA transferred its ownership in the bottlers to FEMSA Refrescos, S.A. de C.V., the corporate predecessor to Coca-Cola FEMSA, S.A.B. de C.V.

In June 1993, a subsidiary of The Coca-Cola Company subscribed for 30% of our capital stock in the form of Series D shares for US$ 195 million.  In September 1993, FEMSA sold Series L shares that represented 19% of our capital stock to the public, and we listed these shares on the Mexican Stock Exchange and, in the form of ADSs, on the New York Stock Exchange.  In a series of transactions between 1994 and 1997, we acquired territories in Argentina and additional territories in southern Mexico.

In May 2003, we acquired Panamerican Beverages, or Panamco, and began producing and distributing Coca-Cola trademark beverages in additional territories in the central and the gulf regions of Mexico and in Central America (Guatemala, Nicaragua, Costa Rica and Panama), Colombia, Venezuela and Brazil, along with bottled water, beer and other beverages in some of these territories.  As a result of the acquisition, the interest of The Coca-Cola Company in the capital stock of our company increased from 30.0% to 39.6%.

During August 2004, we conducted a rights offering to allow existing holders of our Series L shares and ADSs to acquire newly-issued Series L shares in the form of Series L shares and ADSs, respectively, at the same price per share at which FEMSA and The Coca-Cola Company subscribed in connection with the Panamco acquisition.  In March 2006, our shareholders approved the non-cancellation of the 98,684,857 Series L shares (equivalent to approximately 9.87 million ADSs, or over one-third of the issued Series L shares at the time) that were not subscribed for in the rights offering which were available for subscription at a price of no less than US$ 2.216 per share or its equivalent in Mexican currency.

In November 2006, FEMSA acquired, through a subsidiary, 148,000,000 of our Series D shares from certain subsidiaries of The Coca-Cola Company representing 9.4% of the total outstanding voting shares and 8.0% of the total outstanding equity of Coca-Cola FEMSA, at a price of US$ 2.888 per share for an aggregate amount of US$ 427.4 million.  With this purchase, FEMSA increased its ownership to 53.7% of our capital stock.  Pursuant to our bylaws, the acquired shares were converted from Series D shares to Series A shares.

In November 2007, Administración, S.A.P.I. de C.V., or Administración, a Mexican company owned directly or indirectly by us and The Coca-Cola Company, acquired 100% of the shares of capital stock of Jugos del Valle.  The business of Jugos del Valle in the United States was acquired and sold by The Coca-Cola Company.  Subsequently, we and The Coca-Cola Company and all Mexican and Brazilian Coca-Cola  bottlers entered into a joint business for the Mexican and the Brazilian operations, respectively, of Jugos del Valle, through transactions completed during 2008.  Taking into account the participations held by Grupo Tampico and Grupo CIMSA, we currently hold an interest of 24.0% in the Mexican joint business and approximately 19.7% in the Brazilian joint businesses.  Jugos del Valle sells fruit juice-based beverages and fruit derivatives.

In May 2008, we entered into a transaction with The Coca-Cola Company to acquire its wholly owned bottling franchise Refrigerantes Minas Gerais, Ltda., or REMIL, located in the State of Minas Gerais in Brazil, and we paid a purchase price of US$ 364.1 million in June 2008.  We began to consolidate REMIL in our financial statements as of June 1, 2008.

In December 2007 and May 2008, we sold most of our proprietary brands to The Coca-Cola Company.  The proprietary brands are now being licensed back to us by The Coca-Cola Company pursuant to our bottler agreements.  The December 2007 transaction was valued at US$ 48 million and the May 2008 transaction was valued at US$ 16 million.  We believe that both of these transactions were conducted on an arm’s length basis.  Revenues from the sale of proprietary brands in which we have a significant continuing involvement are deferred and amortized against the related costs of future sales over the estimated sales period.

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In July 2008, we acquired the Agua De Los Angeles jug water business in the Valley of Mexico (Mexico City and surrounding areas) from Grupo Embotellador CIMSA, S.A. de C.V., at the time one of the Coca-Cola  bottling franchises in Mexico, for a purchase price of US$ 18.3 million.  The trademarks remain with The Coca-Cola Company.  We subsequently merged Agua De Los Angeles into our jug water business under the Ciel  brand.

In February 2009, we acquired with The Coca-Cola Company the Brisa bottled water business in Colombia from Bavaria, a subsidiary of SABMiller.  We acquired the production assets and the distribution territory, and The Coca-Cola Company acquired the Brisa  brand.  We and The Coca-Cola Company equally shared in paying the purchase price of US$ 92 million.  Following a transition period, in June 2009, we started to sell and distribute the Brisa  portfolio of products in Colombia.

In May 2009, we entered into an agreement to develop the Crystal  trademark water products in Brazil jointly with The Coca-Cola Company.

In August 2010, we acquired from The Coca-Cola Company along with other Brazilian Coca-Cola  bottlers the business operations of the Matte Leao tea brand.  As of April 20,  2012, we have a 19.4% indirect interest in the Matte Leao business in Brazil.

In March 2011, we acquired with The Coca-Cola Company, through Compañía Panameña de Bebidas S.A.P.I. de C.V., Grupo Industrias Lacteas (also known as Estrella Azul), a Panamanian conglomerate that participates in the dairy and juice-based beverage categories in Panama.  We will continue to develop this business with The Coca-Cola Company.  

In October 2011, we closed our merger with Administradora Acciones del Noreste S.A.P.I. de C.V. (“Grupo Tampico”), one of the largest family-owned Coca-Cola bottlers calculated by sales volume in Mexico. This franchise territory operates in the states of Tamaulipas, San Luis Potosí, and Veracruz, as well as in parts of the states of Hidalgo, Puebla and Queretaro and sold 155.7 million unit cases of beverages in 2011. The aggregate enterprise value of this transaction was Ps. 9,300 million and a total of 63.5 million new KOF Series L shares were issued in connection with this transaction. We began to consolidate Grupo Tampico in our financial statements as of October 2011.

In December 2011, we closed our merger with Corporación de los Angeles, S.A. de C.V. and its shareholders (“Grupo CIMSA”), a Mexican family-owned Coca-Cola bottler with operations mainly in the states of Morelos and Mexico, as well as in parts of the states of Guerrero and Michoacán. This franchise territory sold 154.8 million unit cases of beverages in 2011. The aggregate enterprise value of this transaction was Ps. 11,000 million and a total of 75.4 million new KOF Series L shares were issued in connection with this transaction. We began to consolidate Grupo CIMSA in our financial statements as of December 2011.  As part of our merger with Grupo CIMSA we also acquired a 13.2% equity interest in Promotora Industria Azucarera S.A de C.V. (“Piasa”).

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Recent Mergers and Acquisitions

On December 15, 2011, the Company entered into an agreement to merge the beverage division of Grupo Fomento Queretano S.A.P.I. de C.V. (“Grupo Fomento Queretano”) into the Company. Grupo Fomento Queretano’s beverage division operates mainly in the state of Queretaro, as well as in parts of the states of Mexico, Hidalgo and Guanajuato. The merger agreement was approved by both Coca-Cola FEMSA’s and Grupo Fomento Queretano’s boards of directors and is subject to the approval of the Comisión Federal de Competencia (the Mexican Antitrust Commission or CFC), and the shareholder’s meetings of both companies. The transaction will involve the issuance of approximately 45.1 million of the company’s newly issued series L shares, and in addition the company will assume Ps. 1,221 million in net debt. This transaction is expected to be completed in second quarter of 2012.

In February 2012, we entered into a 12-month exclusivity agreement with The Coca-Cola Company to evaluate the potential acquisition of a controlling ownership stake in the bottling operations owned by The Coca-Cola Company in the Philippines. We remain in the process of evaluating this potential acquisition.

Capital Stock

As of April 20, 2012, FEMSA indirectly owned Series A Shares equal to 50.0% of our capital stock (63.0% of our capital stock with full voting rights).  As of April 20, 2012, The Coca-Cola Company indirectly owned Series D shares equal to 29.4% of the capital stock of our company (37.0% of our capital stock with full voting rights).  Series L shares with limited voting rights, which trade on the Mexican Stock Exchange and in the form of ADSs on the New York Stock Exchange, constitute the remaining 20.6% of our capital stock.¹   

Business Strategy

In August 2011, we restructured our operations under only two new divisions: Mexico & Central America and South America, creating a more flexible structure to execute our strategies and extend our track record of growth.  Previously, we managed our business under three divisions—Mexico, Latincentro, and Mercosur. With this new business structure, we aligned our business strategies more efficiently, ensuring a faster introduction of new products and categories, and a more rapid and effective design and deployment of commercial models. See “Introduction—Business Divisions.”

We operate with a large geographic footprint in Latin America, in two divisions:

·         Mexico and Central America (covering certain territories in Mexico, Guatemala, Nicaragua, Costa Rica and Panama); and

·         South America (covering certain territories in Colombia, Brazil, Venezuela and Argentina).

One of our goals is to maximize growth and profitability to create value for our shareholders.  Our efforts to achieve this goal are based on:  (1) transforming our commercial models to focus on our customers’ value potential and using a value-based segmentation approach to capture the industry’s value potential, (2) implementing multi-segmentation strategies in our major markets to target distinct market clusters divided by consumption occasion, competitive intensity and socioeconomic levels; (3) implementing well-planned product, packaging and pricing strategies through different distribution channels; (4) driving product innovation along our different product categories; (5) developing new businesses and distribution channels, and (6) achieving the full operating potential of our commercial models and processes to drive operational efficiencies throughout our company.  To achieve these goals, we intend to continue to focus our efforts on, among other initiatives, the following:

·         working with The Coca-Cola Company to develop a business model to continue exploring and participating in new lines of beverages, extending existing product lines and effectively advertising and marketing our products;

·         developing and expanding our still beverage portfolio through innovation, strategic acquisitions and by entering into agreements to acquire companies with The Coca-Cola Company;

·         expanding our bottled water strategy, with The Coca-Cola Company through innovation and selective acquisitions to maximize profitability across our market territories;

·         strengthening our selling capabilities and go-to-market strategies, including pre-sale, conventional selling and hybrid routes, in order to get closer to our clients and help them satisfy the beverage needs of consumers;

·         implementing selective packaging strategies designed to increase consumer demand for our products and to build a strong returnable base for the Coca-Cola  brand;

·         replicating our best practices throughout the value chain;

·         rationalizing and adapting our organizational and asset structure in order to be in a better position to respond to a changing competitive environment;

·         committing to building a multi-cultural collaborative team, from top to bottom; and

·         broadening our geographic footprint through organic growth and strategic joint ventures, mergers and acquisitions.

We seek to increase per capita consumption of our products in the territories in which we operate.  To that end, our marketing teams continuously develop sales strategies tailored to the different characteristics of our various territories and distribution channels.  We continue to develop our product portfolio to better meet market demand and maintain our overall profitability.  To stimulate and respond to consumer demand, we continue to introduce new categories, products and presentations.  See “—Product and Packaging Mix.”  In addition, because we view our relationship with The Coca-Cola Company as integral to our business, we use market information systems and strategies developed with The Coca-Cola Company to improve our business and marketing strategies.  See “Item 4. Information on the Company—The Company—Description of Property, Plant and Equipment.”

We also continuously seek to increase productivity in our facilities through infrastructure and process reengineering for improved asset utilization.  Our capital expenditure program includes investments in production and distribution facilities, bottles, cases, coolers and information systems.  We believe that this program will allow us to maintain our capacity and flexibility to innovate and to respond to consumer demand for our products.

We focus on management quality as a key element of our growth strategy and remain committed to fostering the development of quality management at all levels.  Both FEMSA and The Coca-Cola Company provide us with managerial experience.  To build upon these skills, we also offer management training programs designed to enhance our executives’ abilities and to provide a forum for exchanging experiences, know-how and talent among an increasing number of multinational executives from our new and existing territories.

Sustainable development is an integral part of our strategic framework for business growth.  We base our efforts on five core areas which include: (i) Ethics and Corporate Values, which defines our commitment to acting, defining and organizing ourselves with our corporate values and culture; (ii) Quality of Life in the Company, which encourages the integral development of our employees and their families; (iii) Health and Wellness, to promote an attitude of health, self-care, nutrition and physical activity, both within and outside the company; (iv) Community Engagement, to develop education and learning projects that improve the quality of life in the communities where we operate; and (v) Environmental Care, to establish guidelines that result in actions to minimize the impact that our operations might have on the environment and create a broader awareness of caring for our environment. 

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Our Territories

The following map shows our territories, giving estimates in each case of the population to which we offer products, the number of retailers of our beverages and the per capita consumption of our beverages as of December 31, 2011:

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Per capita consumption data for a territory is determined by dividing total beverage sales volume within the territory (in bottles, cans, and fountain containers) by the estimated population within such territory, and is expressed on the basis of the number of eight-ounce servings of our products consumed annually per capita.  In evaluating the development of local volume sales in our territories and to determine product potential, we and The Coca-Cola Company measure, among other factors, the per capita consumption of all our beverages.

Our Products

We produce, market and distribute Coca-Cola  trademark beverages The Coca-Cola  trademark beverages include:  sparkling beverages (colas and flavored sparkling beverages), waters, and still beverages (including juice drinks, coffee, teas and isotonic).  The following table sets forth our main brands as of December 31, 2011:

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(1)            Includes Mexico, Guatemala, Nicaragua, Costa Rica and Panama

(2)            Includes Colombia, Brazil and Argentina

(3)            Flavored water.  In Brazil, also flavored sparkling beverage

(4)            Juice-based beverage. Includes Hi-C Orangeade in Argentina

(5)            Juice based beverage

(6)            Nestea will no longer be a product licensed by The Coca-Cola Company in our territories as of May 2012 and will be replaced with Fuze Tea.

(7)            Isotonic

(8)            Ready to drink tea

(9)            Orangeade. Includes Fresh in Costa Rica, Nicaragua, Panama, Colombia and Venezuela

(10)          Milk and value-added dairy and juices

(11)          Milk and juice blend

(12)          Juice-based beverages

Sales Overview

We measure total sales volume in terms of unit cases.  Unit case refers to 192 ounces of finished beverage product (24 eight-ounce servings) and, when applied to soda fountains, refers to the volume of syrup, powders and concentrate that is required to produce 192 ounces of finished beverage product.  The following table illustrates our historical sales volume for each of our territories.

(1)   Includes results of Grupo Tampico from October 2011 and Grupo CIMSA from December 2011.

(2)   Includes Guatemala, Nicaragua, Costa Rica and Panama.

(3)   As of June 2009, includes sales from the Brisa bottled water business.

(4)   Excludes beer sales volume.  As of the first quarter of 2010, we began to distribute certain ready to drink products under the Matte Leao brand.  

Product and Packaging Mix

Out of the more than 120 brands and line extensions of beverages that we sell and distribute, our most important brand, Coca-Cola, together with its line extensions, Coca-Cola Light and Coca-Cola Zero, accounted for 61.6% of total sales volume in 2011.  Our next largest brands, Ciel (a water brand from Mexico), Fanta  (and its line extensions), Sprite  (and its line extensions) and ValleFrut  (and its line extensions), accounted for 10.4%, 5.1%, 2.7% and 2.2%, respectively, of total sales volume in 2011.  We use the term line extensions to refer to the different flavors in which we offer our brands.  We produce, market and distribute Coca-Cola  trademark beverages in each of our territories in containers authorized by The Coca‑Cola Company, which consist of a variety of returnable and non-returnable presentations in the form of glass bottles, cans and plastic bottles mainly made of polyethylene terephthalate, which we refer to as PET.

We use the term presentation to refer to the packaging unit in which we sell our products.  Presentation sizes for our Coca-Cola  trademark beverages range from a 6.5-ounce personal size to a 3-liter multiple serving size.  For all of our products excluding water, we consider a multiple serving size as equal to, or larger than, 1.0 liter.   In general, personal sizes have a higher price per unit case as compared to multiple serving sizes.  We offer both returnable and non-returnable presentations, which allow us to offer portfolio alternatives based on convenience and affordability to implement revenue management strategies and to target specific distribution channels and population segments in our territories.  In addition, we sell some Coca-Cola  trademark beverage syrups in containers designed for soda fountain use, which we refer to as fountain.  We also sell bottled water products in bulk sizes, which refer to presentations equal to or larger than 5 liters, which have a much lower average price per unit case than our other beverage products.

The characteristics of our territories are very diverse.  Central Mexico and our territories in Argentina are densely populated and have a large number of competing beverage brands as compared to the rest of our territories.  Our territories in Brazil are densely populated but have lower per capita consumption of beverage products as compared to Mexico.  Portions of southern Mexico, Central America and Colombia are large and mountainous areas with lower population density, lower per capita income and lower per capita consumption of beverages.  In Venezuela, we face operational disruptions from time to time, which may have an effect on our volumes sold, and consequently, may result in lower per capita consumption.

The following discussion analyzes our product and packaging mix by reporting segment.  The volume data presented is for the years 2011, 2010, and 2009.

Mexico and Central America.  Our product portfolio consists of Coca-Cola  trademark beverages.  In 2008, as part of our efforts to strengthen our multi-category beverage portfolio, we incorporated the Jugos del Valle line of juice based beverages in Mexico and subsequently in Central America.  Per capita consumption of our beverage products in Mexico and Central America was 632 and 179 eight-ounce servings, respectively, in 2011.

The following table highlights historical sales volume and mix in Mexico and Central America for our products: 

(1)   Includes results from the operations of Grupo Tampico from October 2011 and from Grupo CIMSA from December 2011.
(2)   Includes bulk water volumes.

In 2011, multiple serving presentations represented 67.6% of total sparkling beverages sales volume in Mexico, remaining flat as compared to 2010 and 55.7% of total sparkling beverages sales volume in Central America, a 60 basis points decrease compared to 2010.  Our strategy is to foster consumption in single serving presentations while maintaining multiple serving volumes.  In 2011, returnable packaging, as a percentage of total sparkling beverage sales volume, accounted for 31.7% in Mexico, a 130 basis points increase compared to 2010; and 31.7% in Central America, a 150 basis points decrease compared to 2010. 

In 2011, our sparkling beverages decreased as a percentage of our total sales volume from 75.2% in 2010 to 74.9% in 2011, mainly due to the integration of Grupo Tampico and Grupo CIMSA in Mexico, which have a higher mix of water in their portfolios.

In 2011, our most popular sparkling beverage presentations in Mexico were the 2.5-liter returnable plastic bottle, the 3.0-liter non-returnable plastic bottle and the 0.6-liter non‑returnable plastic bottle (the 20-ounce bottle that is also popular in the United States), which together accounted for 56.8% of total sparkling beverage sales volume in Mexico. 

Total sales volume reached 1,510.8 million unit cases in 2011, an increase of 9.5% compared to 1,379.3 million unit cases in 2010.  The integration of Grupo Tampico and Grupo CIMSA in Mexico contributed 48.9 million unit cases in 2011of which 63.0% were sparkling beverages, 5.2% bottled water, 27.4% bulk water and 4.4% still beverages. Excluding the integration of these territories, volume grew 6.0% to 1,461.8 million unit cases. Organically sparkling beverages sales volume increased 6.0% as compared to 2010, contributing more than 70% of incremental volumes.  The bottled water category, including bulk water, grew 5.6%, accounting for more than 15% of incremental volumes. The still beverage category increased 7.5%, representing the remainder of incremental volumes.

South America (Excluding Venezuela).  Our product portfolio in South America consists mainly of Coca-Cola  trademark beverages and the Kaiser  beer brands in Brazil, which we sell and distribute. In 2008, as part of our efforts to strengthen our multi-category beverage portfolio, we incorporated the Jugos del Valle line of juice-based beverages in Colombia. This line of beverages was relaunched in Brazil in 2009 as well. The acquisition of Brisa in 2009 helped us to become the leader, calculated by sales volume, in the water market in Colombia. In 2010, we incorporated ready to drink beverages under the Matte Leao brand in Brazil.  During 2011, as part of our continuous effort to develop non-carbonated beverages, we launched Cepita  in non-returnable PET bottles and Hi-C, an orangeade, both in Argentina. Since 2009, as part of our efforts to foster sparkling beverage per capita consumption in Brazil, we re-launched a 2.0-liter returnable plastic bottle for the Coca-Cola  brand and introduced two single-serve 0.25-liter presentations. During 2011, these presentations contributed significantly to incremental volumes in Brazil.  Per capita consumption of our beverages in Colombia, Brazil and Argentina was 129, 261 and 395 eight-ounce servings, respectively, in 2011.  The following table highlights historical total sales volume and sales volume mix in South America (excluding Venezuela), not including beer:

(1)           Includes bulk water volume.

Total sales volume was 948.1 million unit cases in 2011, an increase of 4.3% compared to 909.2 million unit cases in 2010. Growth in sparkling beverages, mainly driven by sales of the Coca-Cola  brand in both Argentina and Colombia, and the Fanta and Schweppes brands in Brazil, accounted for the majority of the growth during the year. Growth in still beverages, mainly driven by the Jugos del Valle line of products in Brazil and the Cepita  juice brand and Hi-C  orangeade in Argentina, represented the balance of incremental volumes. These increases compensated for a decrease in volume in our water portfolio, including bulk water, mainly driven by the reduction in volume of the Brisa  brand in Colombia.

In 2011, returnable packaging, as a percentage of total sparkling beverage sales volume, accounted for 39.6% in Colombia, a 240 basis points decrease compared to 2010; 27.8% in Argentina, a decrease of 70 basis points and 15.8% in Brazil, a 100 basis points increase compared to 2010.  In 2011, multiple serving presentations represented 62.1%, 71.3% and 85.0% of total sparkling beverages sales volume in Colombia, Brazil and Argentina, respectively.

We continue to distribute and sell the Kaiser  beer portfolio in our Brazilian territories through the 20-year term, consistent with the arrangements in place with Cervejarias Kaiser, a subsidiary of the Heineken Group, since 2006, prior to the acquisition of Cervejarias Kaiser by Cuauhtémoc Moctezuma Holding, S.A. de C.V., formerly known as FEMSA Cerveza.  Beginning in the second quarter of 2005, we ceased including beer that we distribute in Brazil in our reported sales volumes.  On April 30, 2010, the transaction pursuant to which FEMSA agreed to exchange 100% of its beer operations for a 20% economic interest in the Heineken Group closed. 

Venezuela.  Our product portfolio in Venezuela consists of Coca-Cola  trademark beverages.  Per capita consumption of our beverages in Venezuela during 2011 was 150 eight-ounce servings.

The following table highlights historical total sales volume and sales volume mix in Venezuela:

(1)           Includes bulk water volume.

We have implemented a product portfolio rationalization strategy that allows us to minimize the impact of certain operating disruptions that have been recurrent in Venezuela over the last several years.  During 2011, we faced a 26 day strike at one of our Venezuelan production and distribution facilities and a difficult economic environment that prevented us from growing sales volume of our products.  As a result our sparkling beverage volume decreased by 9.6%.

In 2011, multiple serving presentations represented 78.4% of total sparkling beverages sales volume in Venezuela, an 80 basis points increase compared to 2010.  In 2011, returnable presentations represented 8.0% of total sparkling beverages sales volume in Venezuela, a 40 basis points increase compared to 2010. Total sales volume was 189.8 million unit cases in 2011, a decrease of 10.0% compared to 211.0 million unit cases in 2010

Seasonality

Sales of our products are seasonal, as our sales levels generally increase during the summer months of each country and during the Christmas holiday season.  In Mexico, Central America, Colombia and Venezuela, we typically achieve our highest sales during the summer months of April through September as well as during the Christmas holidays in December.  In Brazil and Argentina, our highest sales levels occur during the summer months of October through March and the Christmas holidays in December.

Marketing

Our Company, in conjunction with The Coca-Cola Company, has developed a marketing strategy to promote the sale and consumption of our products.  We rely extensively on advertising, sales promotions and retailer support programs to target the particular preferences of our consumers.  Our consolidated marketing expenses in 2011, net of contributions by The Coca-Cola Company, were Ps. 4,508 million.  The Coca-Cola Company contributed an additional Ps. 2,561 million in 2011, which mainly includes contributions for coolers, bottles and cases.  Through the use of advanced information technology, we have collected customer and consumer information that allow us to tailor our marketing strategies to target different types of customers located in each of our territories and to meet the specific needs of the various markets we serve.

Retailer Support Programs.  Support programs include providing retailers with point-of-sale display materials and consumer sales promotions, such as contests, sweepstakes and the giveaway of product samples.

Coolers.  Cooler distribution among retailers is important for the visibility and consumption of our products and to ensure that they are sold at the proper temperature. 

Advertising.  We advertise in all major communications media.  We focus our advertising efforts on increasing brand recognition by consumers and improving our customer relations.  National advertising campaigns are designed and proposed by The Coca-Cola Company’s local affiliates, with our input at the local or regional level.

Channel Marketing.  In order to provide more dynamic and specialized marketing of our products, our strategy is to classify our markets and develop targeted efforts for each consumer segment or distribution channel.  Our principal channels are small retailers, “on-premise” consumption such as restaurants and bars, supermarkets and third party distributors.  Presence in these channels entails a comprehensive and detailed analysis of the purchasing patterns and preferences of various groups of beverage consumers in each of the different types of locations or distribution channels.  In response to this analysis, we tailor our product, price, packaging and distribution strategies to meet the particular needs of and exploit the potential of each channel.

Multi-Segmentation.  We have been implementing a multi-segmentation strategy in the majority of our markets.  This strategy consists of the implementation of different product/price/package portfolios by market cluster or group.  These clusters are defined based on consumption occasion, competitive intensity and socio-economic levels, rather than solely on the types of distribution channels.

Client Value Management.  We have been transforming our commercial models to focus on our customers’ value potential using a value-based segmentation approach to capture the industry’s potential.  We started the rollout of this new model in our Mexico, Central America, Colombia and Brazil operations in 2009 and have covered close to 90% of our total volumes as of the end of 2011.

We believe that the implementation of these strategies described above also enables us to respond to competitive initiatives with channel-specific responses as opposed to market-wide responses.  In addition, it allows us to be more efficient in the way we go to market and invest our marketing resources in those segments that could provide a higher return.  Our marketing, segmentation and distribution activities are facilitated by our management information systems.  We have invested significantly in creating these systems, including in hand-held computers to support the gathering of product, consumer and delivery information for most of our sales routes throughout our territories.

Product Sales and Distribution

The following table provides an overview of our distribution centers and the retailers to which we sell our products:

Product Distribution Summary

as of December 31, 2011

(1)     Includes Mexico, Guatemala, Nicaragua, Costa Rica and Panama.

(2)     Includes Colombia, Brazil and Argentina.

(3)     Estimated.

We continuously evaluate our distribution model in order to fit with the local dynamics of the marketplace and analyze the way we go to market, recognizing different service needs from our customers, while looking for a more efficient distribution model.  As part of this strategy, we are rolling out a variety of new distribution models throughout our territories looking for improvements in our distribution network.

We use several sales and distribution models depending on market, geographic conditions and the customer’s profile:  (1) the pre-sale system, which separates the sales and delivery functions, permitting trucks to be loaded with the mix of products that retailers have previously ordered, thereby increasing both sales and distribution efficiency, (2) the conventional truck route system, in which the person in charge of the delivery makes immediate sales from inventory available on the truck, (3) a hybrid distribution system, where the same truck carries product available for immediate sale and product previously ordered through the pre-sale system, (4) the telemarketing system, which could be combined with pre-sales visits and (5) sales through third-party wholesalers of our products.

As part of the pre-sale system, sales personnel also provide merchandising services during retailer visits, which we believe enhance the shopper experience at the point of sale.  We believe that an adequate number of service visits to retailers and frequency of deliveries are essential elements in an effective selling and distribution system for our products.

Our distribution centers range from large warehousing facilities and re-loading centers to small deposit centers.  In addition to our fleet of trucks, we distribute our products in certain locations through electric carts and hand-trucks in order to comply with local environmental and traffic regulations.  In some of our territories, we retain third parties to transport our finished products from the bottling plants to the distribution centers.

Mexico.  We contract with a subsidiary of FEMSA for the transportation of finished products to our distribution centers from our Mexican production facilities.  See “Item 7.  Major Shareholders and Related Party Transactions—Related Party Transactions.”  From the distribution centers, we then distribute our finished products to retailers through our own fleet of trucks.

In Mexico, we sell a majority of our beverages at small retail stores to consumers who may take the beverages for consumption at home or elsewhere.  We also sell products through the “on-premise” consumption segment, supermarkets and other locations.  The “on-premise” consumption segment consists of sales through sidewalk stands, restaurants, bars and various types of dispensing machines as well as sales through point-of-sale programs in concert halls, auditoriums and theaters.

Brazil.    In Brazil, we sold 21.1% of our total sales volume through supermarkets in 2011.  Also in Brazil, the delivery of our finished products to customers is completed by a third party, while we maintain control over the selling function.  In designated zones in Brazil, third-party distributors purchase our products at a discount from the wholesale price and resell the products to retailers.

Territories other than Mexico and Brazil.  We distribute our finished products to retailers through a combination of our own fleet of trucks and third party distributors.  In most of our territories, an important part of our total sales volume is sold through small retailers, with low supermarket penetration. 

Competition

Although we believe that our products enjoy wider recognition and greater consumer loyalty than those of our principal competitors, the markets in the territories in which we operate are highly competitive.  Our principal competitors are local Pepsi  bottlers and other bottlers and distributors of national and regional beverage brands.  We face increased competition in many of our territories from producers of low price beverages, commonly referred to as “B brands.”  A number of our competitors in Central America, Venezuela, Brazil and Argentina offer beer in addition to sparkling beverages, still beverages, and water, which may enable them to achieve distribution efficiencies.

Price discounting and packaging have joined consumer sales promotions, customer service and non-price retailer incentives as the primary means of competition among bottlers.  We compete by seeking to offer products at an attractive price in the different segments in our markets and by building on the value of our brands.  We believe that the introduction of new products and new presentations has been a significant competitive technique that allows us to increase demand for our products, provide different options to consumers and increase new consumption opportunities.  See “—Sales Overview.”

Mexico and Central America.  Our principal competitors in Mexico are bottlers of Pepsi  products, whose territories overlap but are not co-extensive with our own.  We compete with a joint venture recently formed by Grupo Embotelladores Unidos, S.A.B. de C.V., the former Pepsi  bottler in central and southeast Mexico, a subsidiary of PepsiCo, and Empresas Polar, S.A., the leading beer distributor and Pepsi  bottler in Venezuela.  Our main competition in the juice category in Mexico is Grupo Jumex.  In the water category, Bonafont, a water brand owned by Group Danone, is our main competition.  In addition, we compete with Cadbury Schweppes in sparkling beverages and with other national and regional brands in our Mexican territories, as well as low-price producers, such as Big Cola and Consorcio AGA, S.A. de C.V., that offer various presentations of sparkling and still beverages.

In the countries that comprise our Central America region, our main competitors are Pepsi  and Big Cola bottlers.  In Guatemala and Nicaragua, we compete with a joint venture between AmBev and The Central American Bottler Corporation.  In Costa Rica, our principal competitor is Florida Bebidas S.A., subsidiary of Florida Ice and Farm Co..  In Panama, our main competitor is Cervecería Nacional, S.A.  We also face competition from “B brands” offering multiple serving size presentations in some Central American countries.

South America (excluding Venezuela).  Our principal competitor in Colombia is Postobón, a well-established local bottler that sells flavored sparkling beverages, some of which have a wide consumption preference, such as manzana Postobón (apple Postobón), which is the second most popular flavor in the Colombian sparkling beverage industry in terms of total sales volume.  Postobón also sells Pepsi  products.  Postobón is a vertically integrated producer, the owners of which hold other significant commercial interests in Colombia.  We also compete with low-price producers, such as the producers of Big Cola, which principally offer multiple serving size presentations in the sparkling and still beverage industry.

In Brazil, we compete against AmBev, a Brazilian company with a portfolio of brands that includes Pepsi, local brands with flavors such as guaraná, and proprietary beer brands.  We also compete against “B brands” or “Tubainas,” which are small, local producers of low‑cost flavored sparkling beverages in multiple serving presentations that represent a significant portion of the sparkling beverage market. 

In Argentina, our main competitor is Buenos Aires Embotellador S.A. (BAESA), a Pepsi  bottler, which is owned by Argentina’s principal brewery, Quilmes Industrial S.A., and indirectly controlled by AmBev.  In addition, we compete with a number of competitors offering generic, low-priced sparkling beverages as well as many other generic products and private label proprietary supermarket brands.

Venezuela.  In Venezuela, our main competitor is Pepsi-Cola Venezuela, C.A., a joint venture formed between PepsiCo and Empresas Polar, S.A., the leading beer distributor in the country.  We also compete with the producers of Big Cola in part of the country.  

Raw Materials

Pursuant to our bottler agreements, we are authorized to manufacture, sell and distribute Coca-Cola  trademark beverages within specific geographic areas, and we are required to purchase in some of our territories for all Coca-Cola  trademark beverages concentrate from companies designated by The Coca-Cola Company and artificial sweeteners from companies authorized by The Coca-Cola Company.  Concentrate prices for sparkling beverages are determined as a percentage of the weighted average retail price in local currency net of applicable taxes.  Although The Coca-Cola Company has the right to unilaterally set the price of concentrates, in practice this percentage has historically been set pursuant to periodic negotiations with The Coca-Cola Company.

In 2005, The Coca-Cola Company decided to gradually increase concentrate prices for sparkling beverages in Brazil and Mexico. These increases were fully implemented in Brazil in 2008 and in Mexico in 2009.  As part of the cooperation framework that we reached with The Coca-Cola Company at the end of 2006, The Coca-Cola Company will provide a relevant portion of the funds derived from the concentrate increase for marketing support of our sparkling and still beverages portfolio.  See “Item 7.  Major Shareholders and Related Party Transactions—Major Shareholders—Cooperation Framework with The Coca-Cola Company.”  

In addition to concentrate, we purchase sweeteners, carbon dioxide, resin and ingots to make plastic bottles, finished plastic and glass bottles, cans, caps and fountain containers, as well as other packaging materials and raw materials. Sweeteners are combined with water to produce basic syrup, which is added to the concentrate as the sweetener for most of our beverages. Our bottler agreements provide that, with respect to Coca-Cola trademark beverages, these materials may be purchased only from suppliers approved by The Coca-Cola Company, including affiliates of FEMSA. Prices for packaging materials and HFCS historically have been determined with reference to the U.S. dollar, although the local currency equivalent in a particular country is subject to price volatility in accordance with changes in exchange rates. Our most significant packaging raw material costs arise from the purchase of resin, plastic ingots to make plastic bottles and finished plastic bottles, which we obtain from international and local producers. The prices of these materials are tied to crude oil prices and global resin supply. In recent years we have experienced volatility in the prices we pay for these materials. Across our territories, our average price for resin in U.S. dollars increased approximately 30% in 2011 as compared to 2010.

Under our agreements with The Coca-Cola Company, we may use raw or refined sugar or HFCS as sweeteners in our products. Sugar prices in all of the countries in which we operate, other than Brazil, are subject to local regulations and other barriers to market entry that cause us to pay in excess of international market prices for sugar in certain countries. In recent years, international sugar prices experienced significant volatility.

None of the materials or supplies that we use is presently in short supply, although the supply of specific materials could be adversely affected by strikes, weather conditions, governmental controls or national emergency situations.

Mexico and Central America.  In Mexico, we purchase our returnable plastic bottles from Graham Packaging México, S.A. de C.V., known as Graham, which is the exclusive supplier of returnable plastic bottles to The Coca-Cola Company and its bottlers in Mexico. We mainly purchase resin from Indorama Ventures Polymers México, S. de R.L. de C.V. (formerly Arteva Specialties, S. de R.L. de C.V.), M. & G. Polímeros México S.A. de C.V. and DAK Resinas Americas Mexico S.A. de C.V., which ALPLA México S.A. de C.V., known as ALPLA, and Envases Innovativos de México S.A. de C.V. manufacture into non-returnable plastic bottles for us.

We purchase all of our cans from Promotora Mexicana de Embotelladoras, S.A. de C.V., known as PROMESA, a cooperative of Coca-Cola  bottlers, in which, as of April 20, 2012, we hold a 25.0% equity interest.  We mainly purchase our glass bottles from Compañía Vidriera, S.A. de C.V., known as VITRO, and Glass & Silice, S.A. de C.V., (formerly Vidriera de Chihuahua, S.A. de C.V., or VICHISA), a wholly-owned subsidiary of  Cuauhtémoc Moctezuma Holding, S.A. de C.V. (formerly FEMSA Cerveza), currently a wholly-owned subsidiary of the Heineken Group. 

We purchase sugar from, among other suppliers, Piasa and Beta San Miguel, S.A. de C.V., or Beta San Miguel, both sugar cane producers in which, as of April 20, 2012, we hold an approximate 13.2% and 2.5% equity interest, respectively. We purchase HFCS from CP Ingredientes, S.A. de C.V. and Almidones Mexicanos, S.A. de C.V., known as Almex.

Imported sugar is subject to import duties, the amount of which is set by the Mexican government. As a result, sugar prices in Mexico are in excess of international market prices for sugar, and in 2011, were 47% higher on average in Mexico. In 2011,  sugar prices increased approximately 29% as compared to 2010. 

In Central America, the majority of our raw materials such as glass and plastic bottles are purchased from several local suppliers. We purchase all of our cans from PROMESA. Sugar is available from suppliers that represent several local producers.  Local sugar prices, in the countries that comprise the region, have increased mainly due to volatility in international prices. In Costa Rica, we acquire plastic non-returnable bottles from ALPLA C.R. S.A., and in Nicaragua we acquire such plastic bottles from ALPLA Nicaragua, S.A.

South America (excluding Venezuela).  In Colombia, we use sugar as a sweetener in most of our products, which we buy from several domestic sources.  During 2011, we started to use HFCS as an alternative sweetener for our products. We purchase HFCS from Archer Daniels Midland Company. We purchase plastic bottles from Amcor and Tapón Corona de Colombia S.A. We purchase all our glass bottles from Peldar O-I and cans from Crown, both suppliers in which Grupo Ardila Lulle, owners of our competitor Postobón, own a minority equity interest.  Glass bottles and cans are available only from these local sources.

Sugar is available in Brazil at local market prices, which historically have been similar to international prices.  Sugar prices in Brazil in recent periods have been volatile, mainly due to the increased demand for sugar cane for production of alternative fuels, and our average acquisition cost for sugar in 2011  increased approximately 30% as compared to 2010.  See “Item 11. Quantitative and Qualitative Disclosures about Market Risk—Commodity Price Risk.”  We purchase glass bottles, plastic bottles and cans from several domestic and international suppliers. 

In Argentina, we mainly use HFCS that we purchase from several different local suppliers as a sweetener in our products instead of sugar.  We purchase glass bottles, plastic cases and other raw materials from several domestic sources.  We purchase pre-formed plastic ingots, as well as returnable plastic bottles, at competitive prices from Embotelladora del Atlántico S.A., a local subsidiary of Embotelladora Andina S.A., a Coca-Cola bottler with operations in Argentina, Chile and Brazil, and other local suppliers.  We also acquire pre-formed plastic ingots from ALPLA Avellaneda S.A. and other suppliers.  We produce our own can presentations, aseptic packaging and hot filled products for distribution of our products to our  customers in Buenos Aires.

Venezuela.  We use sugar as a sweetener in all of our products, which we purchase mainly from the local market.  Since 2003, from time to time, we have experienced a sugar shortage due to lower domestic production and the inability of the predominant sugar importers to obtain permission to import in a timely manner.   While sugar distribution to the food and beverages industry and to retailers is controlled by the government, we did not experience any disruptions during 2011 with respect to acces to sufficient sugar supply. However, we cannot assure you that we will not experience disruptions in our ability to meet our sugar requirements in the future should the Venezuelan government impose restrictive measures in the future. We buy glass bottles from one local supplier, Productos de Vidrio, S.A., but there are alternative suppliers authorized by The Coca-Cola Company. We acquire most of our plastic non-returnable bottles from ALPLA de Venezuela, S.A. and all of our aluminum cans from a local producer, Dominguez Continental, C.A.

Under current regulations promulgated by the Venezuelan authorities, our ability to import some of our raw materials and other supplies used in our production could be limited, and access to the official exchange rate for these items for us and our suppliers, including, among others, resin, aluminum, plastic caps, distribution trucks and vehicles is only achieved by obtaining proper approvals from the relevant authorities.

REGULATION

We are subject to regulation in each of the territories in which we operate. The adoption of new laws or regulations in the countries in which we operate may increase our operating costs, our liabilities or impose restrictions on our operations which, in turn, may adversely affect our financial condition, business and results from operations. Further changes in current regulations may result in an increase in compliance costs, which may have an adverse effect on our future results from operations or financial condition.

Price Controls

Voluntary price restraints or statutory price controls have been imposed historically in several of the countries in which we operate. Currently, there are no price controls on our products in any of the territories in which we have operations, except for (i) Argentina, where authorities directly supervise certain products sold through supermarkets to control inflation; and (ii) Venezuela, where the government has recently imposed price controls on certain products including still bottled water. See “Item 3. Key Information—Risk Factors—Regulatory developments may adversely affect our business.” 

Taxation of Sparkling Beverages

All the countries in which we operate, except for Panama, impose a value-added tax on the sale of sparkling beverages, with a rate of 16% in Mexico, 12% in Guatemala, 15% in Nicaragua, 13% in Costa Rica, 16% in Colombia (applied only to the first sale in the supply chain), 12% in Venezuela, 17% (Mato Grosso do Sul) and 18% (São Paulo and Minas Gerais) in Brazil, and 21% in Argentina.  In addition, several of the countries in which we operate impose the following excise or other taxes:

·         Guatemala imposes an excise tax of 0.18 cents in local currency (Ps. 0.3221 as of December 31, 2011) per liter of sparkling beverage.

·         Costa Rica imposes a specific tax on non-alcoholic bottled beverages based on the combination of packaging and flavor, currently assessed at 15.50 colones (Ps. 0.4180 as of December 31, 2011) per 250 ml, and an excise tax on local brands of 5%, foreign brands of 10% and mixers of 14%. 

·         Nicaragua imposes a 9% tax on consumption, and municipalities impose a 1% tax on our Nicaraguan gross income.

·         Panama imposes a 5% tax based on the cost of goods produced.  Panama also imposes a 10% selective consumption tax on syrups, powders and concentrate.

·         Brazil imposes an average production tax of approximately 4.9% and an average sales tax of approximately 9.6%, both assessed by the federal government.  Most of these taxes are fixed, based on average retail prices in each state where the company operates (VAT) or fixed by the federal government (excise and sales tax).

·         Argentina imposes an excise tax on sparkling beverages containing less than 5% lemon juice or less than 10% fruit juice of 8.7%, and an excise tax on flavored sparkling beverages with 10% or more fruit juice and on sparkling water of 4.2%, although this excise tax is not applicable to certain of our products.

Water Supply Law

In Mexico, we obtain water directly from municipal utility companies and pump water from our own wells pursuant to concessions obtained from the Mexican government on a plant-by-plant basis.  Water use in Mexico is regulated primarily by the Ley de Aguas Nacionales de 1992 (the 1992 Water Law), which was amended in 2004, and regulations issued thereunder, which created the Comisión Nacional del Agua (the National Water Commission).  The National Water Commission is in charge of overseeing the national system of water use.  Under the 1992 Water Law, as amended, concessions for the use of a specific volume of ground or surface water generally run from five to fifty-year terms, depending on the supply of groundwater in each region as projected by the National Water Commission. Concessionaires may request concession terms be extended before the expiration of the same. The Mexican government is authorized to reduce the volume of ground or surface water granted for use by a concession by whatever volume of water is not used by the concessionaire for two consecutive years. However, because the current concessions for each of our plants in Mexico do not match each plant’s projected needs for water in future years, we successfully negotiated with the Mexican government the right to transfer the unused volume under concessions from certain plants to other plants anticipating greater water usage in the future.  Our concessions may be terminated if, among other things, we use more water than permitted or we fail to pay required concession-related fees and do not cure such situations in a timely manner.  Although we have not undertaken independent studies to confirm the sufficiency of the existing or future groundwater supply, we believe that our existing concessions satisfy our current water requirements in Mexico.

In Argentina, a state water company provides water to our Alcorta plant on a limited basis; however, we believe the authorized amount meets our requirements for this plant.  In our Monte Grande plant in Argentina, we pump water from our own wells, in accordance with Law 25.688.

In Brazil, we buy water directly from municipal utility companies and we also capture water from underground sources, wells, or surface sources (i.e. rivers), pursuant to concessions granted by the Brazilian government for each plant.  According to the Brazilian Constitution, water is considered an asset of common use and can only be exploited for the national interest by Brazilians or companies formed under Brazilian law.  Concessionaires and users have the responsibility for any damage to the environment.  The exploitation and use of water is regulated by the Código de Mineração (Code of Mining, Decree Law No. 227/67), the Código de Águas Minerais (Mineral Water Code, Decree Law No. 7841/45), the National Water Resources Policy (Law No. 9433 / 97) and by regulations issued thereunder.  The companies that exploit water are supervised by the Departamento Nacional de Produção Mineiral – DNPM (National Department of Mineral Production) and the National Water Agency in connection with federal health agencies, as well as state and municipal authorities.  In the Jundiaí and Belo Horizonte plants, we do not exploit mineral water.  In the Mogi das Cruzes and Campo Grande plants, we have all the necessary permits for the exploitation of mineral water.

In Colombia, in addition to natural spring water, we obtain water directly from our own wells and from utility companies.  We are required to have a specific concession to exploit water from natural sources.  Water use in Colombia is regulated by law no. 9 of 1979 and decrees no. 1594 of 1984 and no. 2811 of 1974.  The National Institute of National Resources supervises companies that exploit water. 

In Nicaragua, the use of water is regulated by the Ley General de Aguas Nacionales (National Water Law), and we obtain water directly from our own wells.  In Costa Rica, the use of water is regulated by the Ley de Aguas (Water Law).  In both of these countries, we own and exploit our own water wells granted to us through governmental concessions.  In Guatemala, no license or permits are required to exploit water from the private wells in our own plants.  In Panama, we acquire water from a state water company, and the use of water is regulated by the Reglamento de Uso de Aguas de Panamá (Panama Use of Water Regulation).  In Venezuela, we use private wells in addition to water provided by the municipalities, and we have taken the appropriate actions, including actions to comply with water regulations, to have water supply available from these sources, regulated by the Ley de Aguas (Water Law).

We cannot assure you that water will be available in sufficient quantities to meet our future production needs, that we will be able to maintain our current concessions or that additional regulations relating to water use will not be adopted in the future in our territories.  We believe we are in material compliance with the terms of our existing water concessions and that we are in compliance with all relevant water regulations.

Environmental Matters

In all of our territories, our operations are subject to federal and state laws and regulations relating to the protection of the environment. In Mexico, the principal legislation is the Ley General de Equilibrio Ecológico y Protección al Ambiente (the Federal General Law for Ecological Equilibrium and Environmental Protection) or the Mexican Environmental Law and the Ley General para la Prevención y Gestión Integral de los Residuos (the General Law for the Prevention and Integral Management of Waste) which are enforced by the Secretaría del Medio Ambiente y Recursos Naturales (the Ministry of the Environment and Natural Resources, or SEMARNAT).  SEMARNAT can bring administrative and criminal proceedings against companies that violate environmental laws, and it also has the power to close non-complying facilities.  Under the Mexican Environmental Law, rules have been promulgated concerning water, air and noise pollution and hazardous substances.  In particular, Mexican environmental laws and regulations require that we file periodic reports with respect to air and water emissions and hazardous wastes and set forth standards for waste water discharge that apply to our operations. We are also subject to certain minimal restrictions on the operation of delivery trucks in Mexico City. We have implemented several programs designed to facilitate compliance with air, waste, noise and energy standards established by current Mexican federal and state environmental laws, including a program that installs catalytic converters and liquid petroleum gas in delivery trucks for our operations in Mexico City. See “—The Company—Total Sales Distribution.”

In addition, we are subject to the 1992 Water Law, as amended, enforced by the Mexican National Water Commission. The 1992 Water Law, as amended, provides that plants located in Mexico that use deep water wells to supply their water requirements must pay a fee to the local governments for the discharge of residual waste water to drainage. Pursuant to this law, certain local authorities test the quality of the waste water discharge and charge plants an additional fee for measurements that exceed certain standards published by the Mexican National Water Commission; in case of non-compliance with the law, penalties may be imposed, including closures. All of our bottler plants located in Mexico have met these standards. In addition, our plants in Apizaco and San Cristóbal are certified with ISO 14001. See “—Description of Property, Plant and Equipment.”

In our Mexican operations, we established a partnership with The Coca-Cola Company and ALPLA, a supplier of plastic bottles to us in Mexico, to create Industria Mexicana de Reciclaje (IMER), a PET recycling facility located in Toluca, Mexico.  This facility started operations in 2005 and has a recycling capacity of approximately 25,000 metric tons per year from which 15,000 metric tons can be re-used in PET bottles for food packaging purposes.  We have also continued contributing funds to a nationwide recycling company, ECOCE, or Ecología y Compromiso Empresarial (Environmentally Committed Companies).  In addition, our plants located in Toluca, Reyes, Cuautitlán, Apizaco, San Cristobal, Morelia, Ixtacomitan, Coatepec, Poza Rica and Cuernavaca have received a Certificado de Industria Limpia (Certificate of Clean Industry). 

As part of our environmental protection and sustainability strategies, in December 2009, we, jointly with strategic partners, entered into a wind energy supply agreement with a Mexican subsidiary of the Spanish wind farm developer, GAMESA Energía, S.A., or GAMESA, to supply green energy to our bottling facility in Toluca, Mexico, owned by our subsidiary, Propimex, S. de R.L. de C.V., or Propimex, and to some of our suppliers of PET bottles.  The wind farm, which is located in La Ventosa, Oaxaca, is expected to generate approximately 100 thousand megawatt hours annually.  The energy supply services began in April 2010 and, during 2010, provided us with approximately 45 thousand megawatt hours.  In 2010, GAMESA sold its interest in the Mexican subsidiary that owned the above mentioned wind farm to Iberdrola Renovables México, S.A. de C.V.

Additionally, several of our subsidiaries have entered into 20-year wind power supply agreements with Energía Alterna Istmeña, S. de R.L. de C.V. and Energía Eólica Mareña, S.A. de C.V. (together, the Mareña Renovables Wind Power Farm) to receive electrical energy for use at our production and distribution facilities throughout Mexico.    The Mareña Renovables Wind Farm will be located in the state of Oaxaca and we expect that  it will begin operations in 2013.

Our Central American operations are subject to several federal and state laws and regulations relating to the protection of the environment, which have been enacted in the last ten years, as awareness has increased in this region about the protection of the environment and the disposal of hazardous and toxic materials, as well as water usage.  In some countries in Central America we are in the process of bringing our operations into compliance with new environmental laws on the timeline established by the relevant regulatory authorities.  Our Costa Rica and Panama operations have participated in a joint effort along with the local division of The Coca-Cola Company, Misión Planeta (Mission Planet), for the collection and recycling of non-returnable plastic bottles.

Our Colombian operations are subject to several Colombian federal, state and municipal laws and regulations related to the protection of the environment and the disposal of treated water and toxic and hazardous materials.  These laws include the control of atmospheric emissions, noise emissions, disposal of treated water and strict limitations on the use of chlorofluorocarbons.  For our plants in Colombia, we have obtained the Certificación Ambiental Fase IV (Phase IV Environmental Certificate) demonstrating our compliance at the highest level with relevant Colombian regulations. We are also engaged in nationwide campaigns for the collection and recycling of glass and plastic bottles as well as reforestation programs.  In 2011, jointly with the FEMSA Foundation, we were awarded with the “Western Hemisphere Corporate Citizenship Award” for the social responsibility programs we carried out to respond to the extreme weather experienced in Colombia in 2010 and 2011, known locally as the “winter emergency.” In addition, we also obtained the ISO 9001, ISO-22000 and PAS 220 for our plants located in Medellin, Cali, Bogota, Barranquilla, Bucaramanga and La Calera, as recognition for the highest quality in our production processes.

Our Venezuelan operations are subject to several Venezuelan federal, state and municipal laws and regulations related to the protection of the environment.  The most relevant of these laws are the Ley Orgánica del Ambiente (the Organic Environmental Law), the Ley Sobre Sustancias, Materiales y Desechos Peligrosos (the Substance, Material and Dangerous Waste Law), the Ley Penal del Ambiente (the Criminal Environmental Law) and the Ley de Aguas (the Water Law).  Since the enactment of the Organic Environmental Law in 1995, our Venezuelan subsidiary has presented the proper authorities with plans to bring our production facilities and distribution centers into compliance with applicable laws, which mainly consist of building or expanding the capacity of water treatment plants in our bottling facilities.  Even though we have had to adjust some of the originally proposed timelines due to construction delays, in 2009, we completed the construction and received all the required permits to operate a new water treatment plant in our bottling facility located in the city of Barcelona.  At the end of 2011, we concluded the construction of a new water treatment plant in our bottling plant in the city of Valencia, which will start operations in February 2012.   During 2011, we also commenced construction of a new water treatment plant in our Antimano bottling plant in Caracas, which construction is expected to conclude during the second quarter of 2012. We are also concluding the process of obtaining the necessary authorizations and licenses before we can begin the construction and expansion of our current water treatment plant in our bottling facility in Maracaibo.  In December 2011 we obtained ISO 14000 certification for all of our plants in Venezuela.

In addition, in December 2010, the Venezuelan government approved the Ley Integral de Gestión de la Basura (Comprehensive Waste Management Law), which will regulate solid waste management and which may be applicable to manufacturers of products for mass consumption.  The full scope of this law has not yet been established.

Our Brazilian operations are subject to several federal, state and municipal laws and regulations related to the protection of the environment.  Among the most relevant laws and regulations are those dealing with the emission of toxic and hazardous gases and disposal of wastewater and solid waste, soil contamination by hazardous chemicals, which impose penalties, such as fines, facility closures or criminal charges depending upon the level of non-compliance.

Our production plant located in Jundiaí has been recognized by the Brazilian authorities for its compliance with environmental regulations and for having standards well above those imposed by the law.  The plant has been certified for (i) ISO 9001 since 1993; (ii) ISO 14001 since March 1997; (iii) norm OHSAS 18001 since 2005; (iv) ISO 22000 since 2007; and (v) PAS: 96 since 2010.  In Brazil it is also necessary to obtain concessions from the government to cast drainage.  Our plants in Brazil have been granted this concession, except Mogi das Cruzes, where we have timely begun the process of obtaining one.  In December, 2010 we increased the capacity of the water treatment plant in our Jundiaí facility.

In Brazil, a municipal regulation of the City of São Paulo, implemented pursuant to Law 13.316/2002, came into effect in May 2008.  This regulation requires us to collect for recycling a specified annual percentage of plastic bottles made from PET sold in the City of São Paulo; such percentage increases each year.  As of May 2009, we were required to collect for recycling 50% of the PET bottles sold in the City of São Paulo, as of May 2010, we were required to collect 75%, and as of May 2011, we were required to collect 90%.  Currently, we are not able to collect the entire required volume of PET bottles we sell in the City of São Paulo for recycling.  If we do not meet the requirements of this regulation, which we believe to be more onerous than those imposed by the countries with the highest recycling standards, we could be fined and be subject to other sanctions, such as the suspension of operations in any of our plants and/or distribution centers located in the City of São Paulo.  In May 2008, we and other bottlers in the City of São Paulo, through the Associação Brasileira das Indústrias de Refrigerantes e de Bebidas Não-alcoólicas (Brazilian Soft Drink and Non-Alcoholic Beverage Association, or ABIR), filed a motion requesting a court to overturn this regulation due to the impossibility of compliance.  In addition, in November 2009, in response to a municipal authority request for us to demonstrate the destination of the PET bottles sold in São Paulo, we filed a motion presenting all of our recycling programs and requesting a more practical timeline to comply with the requirements of the law.  In October 2010 the municipal authority of São Paulo levied a fine on our Brazilian operating subsidiary of 250,000 Brazilian reais (approximately Ps. 1,750,000 as of December 31, 2010) on the grounds that the report submitted by our Brazilian operating subsidiary did not comply with the 75% proper disposal requirement for the period from May 2008 to May 2010.  We filed an appeal against this fine. We are currently awaiting resolution of both matters.

In August 2010, Law No. 12.305/2010 established the Brazilian National Solid Waste Policy.  This policy is based on the principle of shared responsibility between the government, companies and the public, and provides for the post-consumption return of products to companies and requires public authorities to implement waste management programs.  This law is regulated by Federal Decree No. 7.404/2010, and was published in December 2010.  We are currently discussing with the relevant authorities the impact this law may have on Brazilian companies in complying with the regulation in effect in the City of São Paulo.

Our Argentine operations are subject to federal and municipal laws and regulations relating to the protection of the environment.  The most significant of these are regulations concerning waste water discharge, which are enforced by the Secretaría de Ambiente y Desarrollo Sustentable (the Ministry of Natural Resources and Sustainable Development) and the Organismo Provincial para el Desarrollo Sostenible (the Provincial Organization for Sustainable Development) for the province of Buenos Aires.  Our Alcorta plant is in compliance with environmental standards and we have been certified for ISO 14001:2004 for the plants and operative units in Buenos Aires.

For all of our plant operations, we employ an environmental management system:  Sistema de Administración Ambiental (Environmental Administration System, or EKOSYSTEM) that is contained within the Sistema Integral de Calidad (Integral Quality System or SICKOF).

We have expended, and may be required to expend in the future, funds for compliance with and remediation under local environmental laws and regulations.  Currently, we do not believe that such costs will have a material adverse effect on our results from operations or financial condition.  However, since environmental laws and regulations and their enforcement are becoming increasingly stringent in our territories, and there is increased recognition by local authorities of the need for higher environmental standards in the countries where we operate, changes in current regulations may result in an increase in costs, which may have an adverse effect on our future results from operations or financial condition.  Management is not aware of any significant pending regulatory changes that would require a significant amount of additional remedial capital expenditures.

We do not believe that our business activities pose a material risk to the environment, and we believe that we are in material compliance with all applicable environmental laws and regulations.

Other regulations

 In December 2009, the Venezuelan government issued a decree requiring a reduction in energy consumption by at least 20% for industrial companies whose consumption is greater than two megawatts per hour and to submit an energy-usage reduction plan.  Some of our bottling operations in Venezuela outside of Caracas met this threshold and we submitted a plan, which included the purchase of generators for our plants.  In January 2010, the Venezuelan government subsequently implemented power cuts and other measures for all industries in Caracas whose consumption was above 35 kilowatts per hour.

In January 2010, the Venezuelan government amended the Ley para la Defensa y Acceso a las Personas a los Bienes y Servicios (Access to Goods and Services Defense Law).  Any violation by a company that produces, distributes and sells goods and services could lead to fines, penalties or the confiscation of the assets used to produce, distribute and sell these goods without compensation.  Although we believe we are in compliance with this law, consumer protection laws in Venezuela are subject to continuing review and changes, and any such changes could lead to an adverse impact on us.

In July 2011 the Venezuelan government passed the Ley de Costos y Precios Justos (Fair Costs and Prices Law). The purpose of this law is to establish the regulations and administrative processes necessary to maintain the price stability of, and equal access to, goods and services. The law also creates the National Ministry of Costs and Prices, whose main role is to oversee price controls and set maximum retail prices on certain consumer goods and services. Of our products, only certain of our still water beverages were affected by these regulations, which mandated to lower our sale prices as of April 2012.  Any failure to comply with this law would result in fines, temporary suspension or the closure of operations. While we are currently in compliance with this law, we cannot assure you that the Venezuelan government’s future regulation of goods and services will not result in a forced reduction of prices in other of our products, which could have a negative effect on our results of operations.

In January 2012, the Costa Rican government approved a decree which regulates the sale of food and beverages in schools. The decree came into effect in 2012.  Enforcement of this law will be gradual, from 2012 to 2014, depending on the specific characteristics of the food and beverage in question. According to the decree, the sale of specific sparkling beverages and still beverages that contain sugar, syrup or HFCS in any type of presentation in schools is prohibited. We will still be allowed to sell water and certain still beverages in schools. We cannot assure you that the Costa Rican government will not further restrict sales of other of our products in schools in the future; any such further restrictions could lead to an adverse impact on our results of operations.

BOTTLER AGREEMENTS

Coca-Cola Bottler Agreements

Bottler agreements are the standard agreements for each territory that The Coca-Cola Company enters into with bottlers outside the United States.  Pursuant to our bottler agreements, we are authorized to manufacture, sell and distribute Coca-Cola  trademark beverages within specific geographic areas, and we are required to purchase in some of our territories for all Coca-Cola  trademark beverages concentrate from companies designated by The Coca-Cola Company and artificial sweeteners from companies authorized by The Coca-Cola Company. 

These bottler agreements also provide that we will purchase our entire requirement of concentrate for Coca-Cola  trademark beverages from The Coca-Cola Company and other authorized suppliers at prices, terms of payment and on other terms and conditions of supply as determined from time to time by The Coca-Cola Company at its sole discretion.  Concentrate prices for sparkling beverages are determined as a percentage of the weighted average retail price in local currency, net of applicable taxes.  Although the price multipliers used to calculate the cost of concentrate and the currency of payment, among other terms, are set by The Coca-Cola Company at its sole discretion, we set the price of products sold to customers at our discretion, subject to the applicability of price restraints.  We have the exclusive right to distribute Coca-Cola trademark beverages for sale in our territories in authorized containers of the nature prescribed by the bottler agreements and currently used by our company.  These containers include various configurations of cans and returnable and non-returnable bottles made of glass and plastic and fountain containers.

The bottler agreements include an acknowledgment by us that The Coca-Cola Company is the sole owner of the trademarks that identify the Coca-Cola trademark beverages and of the secret formulas with which The Coca-Cola Company’s concentrates are made.  Subject to our exclusive right to distribute Coca-Cola trademark beverages in our territories, The Coca-Cola Company reserves the right to import and export Coca-Cola trademark beverages to and from each of our territories.  Our bottler agreements do not contain restrictions on The Coca-Cola Company’s ability to set the price of concentrates charged to our subsidiaries and do not impose minimum marketing obligations on The Coca-Cola Company.  The prices at which we purchase concentrates under the bottler agreements may vary materially from the prices we have historically paid.  However, under our bylaws and the shareholders agreement among certain subsidiaries of The Coca-Cola Company and certain subsidiaries of FEMSA, an adverse action by The Coca-Cola Company under any of the bottler agreements may result in a suspension of certain voting rights of the directors appointed by The Coca-Cola Company.  This provides us with limited protection against The Coca-Cola Company’s ability to raise concentrate prices to the extent that such increase is deemed detrimental to us pursuant to such shareholder agreement and our bylaws.  See “Item 7.  Major Shareholders and Related Party Transactions—Major Shareholders—The Shareholders Agreement.”

The Coca-Cola Company has the ability, at its sole discretion, to reformulate any of the Coca-Cola trademark beverages and to discontinue any of the Coca-Cola trademark beverages, subject to certain limitations, so long as all Coca-Cola trademark beverages are not discontinued.  The Coca-Cola Company may also introduce new beverages in our territories in which case we have a right of first refusal with respect to the manufacturing, packaging, distribution and sale of such new beverages subject to the same obligations as then exist with respect to the Coca-Cola trademark beverages under the bottler agreements.  The bottler agreements prohibit us from producing, bottling or handling beverages other than Coca-Cola trademark beverages, or other products or packages that would imitate, infringe upon, or cause confusion with the products, trade dress, containers or trademarks of The Coca-Cola Company, except under the authority of, or with the consent of, The Coca-Cola Company. The bottler agreements also prohibit us from acquiring or holding an interest in a party that engages in such restricted activities.  The bottler agreements impose restrictions concerning the use of certain trademarks, authorized containers, packaging and labeling of The Coca-Cola Company so as to conform to policies prescribed by The Coca-Cola Company.  In particular, we are obligated to:

·         maintain plant and equipment, staff and distribution facilities capable of manufacturing, packaging and distributing the Coca-Cola trademark beverages in authorized containers in accordance with our bottler agreements and in sufficient quantities to satisfy fully the demand in our territories;

·         undertake adequate quality control measures prescribed by The Coca-Cola Company;

·         develop, stimulate and satisfy fully the demand for Coca-Cola trademark beverages using all approved means, which includes the investment in advertising and marketing plans;

·         maintain a sound financial capacity as may be reasonably necessary to assure performance by us and our affiliates of our obligations to The Coca-Cola Company; and

·         submit annually to The Coca-Cola Company our marketing, management, promotional and advertising plans for the ensuing year.

The Coca-Cola Company contributed a significant portion of our total marketing expenses in our territories during 2011and has reiterated its intention to continue providing such support as part of our cooperation framework.  Although we believe that The Coca-Cola Company will continue to provide funds for advertising and marketing, it is not obligated to do so.  Consequently, future levels of advertising and marketing support provided by The Coca-Cola Company may vary materially from the levels historically provided.  See “Item 7.  Major Shareholders and Related Party Transactions—Major Shareholders—The Shareholders Agreement” and “Item 7.  Major Shareholders and Related Party Transactions—Major Shareholders—Cooperation Framework with The Coca-Cola Company.”

We have separate bottler agreements with The Coca-Cola Company for each of the territories in which we operate, on substantially the same terms and conditions.  These bottler agreements are automatically renewable for ten-year terms, subject to the right of either party to give prior notice that it does not wish to renew a specific agreement.

As of December 31, 2011, we had seven bottler agreements in Mexico, with each one corresponding to a different territory: (i) the agreements for Mexico´s Valley territory expires in June 2013 andApril 2016, (ii) the agreements for the Central territory expires in May 2015 and July 2016, (iii) the agreement for the Northeast territory expires in September 2014, (iv) the agreement for the Bajio territory expires in May 2015, and (v) the agreement for the Southeast territory expires in June 2013. Our bottler agreements with The Coca-Cola Company will expire for our territories in other countries as follows:  Argentina in September 2014; Brazil in April 2014; Colombia in June 2014; Venezuela in August 2016; Guatemala in March 2015; Costa Rica in September 2017; Nicaragua in May 2016; and Panama in November 2014. 

The bottler agreements are subject to termination by The Coca-Cola Company in the event of default by us.  The default provisions include limitations on the change in ownership or control of our company and the assignment or transfer of the bottler agreements and are designed to preclude any person not acceptable to The Coca-Cola Company from obtaining an assignment of a bottler agreement or from acquiring our company independently of other rights set forth in the shareholders’ agreement.  These provisions may prevent changes in our principal shareholders, including mergers or acquisitions involving sales or dispositions of our capital stock, which will involve an effective change of control, without the consent of The Coca-Cola Company.  See “Item 7.  Major Shareholders and Related Party Transactions—Major Shareholders—The Shareholders Agreement.”

We have also entered into tradename license agreements with The Coca-Cola Company pursuant to which we are authorized to use certain trademark names of The Coca-Cola Company with our corporate name.  These agreements have a ten-year term, but are terminated if we cease to manufacture, market, sell and distribute Coca-Cola trademark products pursuant to the bottler agreements or if the shareholders agreement is terminated.  The Coca-Cola Company also has the right to terminate a license agreement if we use its trademark names in a manner not authorized by the bottler agreements.

DESCRIPTION OF PROPERTY, PLANT AND EQUIPMENT

Over the past several years, we made significant capital investments to modernize our facilities and improve operating efficiency and productivity, including:

·         increasing the annual capacity of our bottling plants by installing new production lines;

·         installing clarification facilities to process different types of sweeteners;

·         installing plastic bottle-blowing equipment;

·         modifying equipment to increase flexibility to produce different presentations, including faster sanitation and changeover times on production lines; and

·         closing obsolete production facilities.

See “Item 5.  Operating and Financial Review and Prospects—Capital Expenditures.”

As of December 31, 2011, we owned 35 bottling plants company-wide.  By country, we have fourteen bottling facilities in Mexico, five in Central America, six in Colombia, four in Venezuela, four in Brazil and two in Argentina.

As of December 31, 2011, we operated 249 distribution centers, approximately 51% of which were in our Mexican territories.  We own more than 86% of these distribution centers and lease the remainder.  See “—The Company—Product Sales and Distribution.”

We maintain an “all risk” insurance policy covering our properties (owned and leased), machinery and equipment and inventories as well as losses due to business interruptions.  The policy covers damages caused by natural disaster, including hurricane, hail, earthquake and damages caused by human acts, including explosion, fire, vandalism, riot and losses incurred in connection with goods in transit.  In addition, we maintain an “all risk” liability insurance policy that covers product liability.  We purchase our insurance coverage through an insurance broker.  In most cases the policies are issued by Allianz México, S.A., Compañía de Seguros, and the coverage is partially reinsured in the international reinsurance market.

The table below summarizes by country principal use, installed capacity and percentage utilization of our production facilities:

(1)     Annualized rate.

The table below summarizes by country plant location and facility area of our production facilities:

Bottling Facility by Location
As of December 31, 2011

SIGNIFICANT SUBSIDIARIES

The table below sets forth all of our direct and indirect significant subsidiaries and the percentage of equity of each subsidiary we owned directly or indirectly as of December 31, 2011:

(1)     On March 2, 2012, Propimex, S.A. de C.V. was converted into Propimex, S. de R.L. de C.V. (a limited liability company).

41

Item 4A.  Unresolved Staff Comments 

None.

Item 5.  Operating and Financial Review and Prospects

General

The following discussion should be read in conjunction with, and is qualified in its entirety by reference to, our consolidated financial statements including the notes thereto.  Our consolidated financial statements were prepared in accordance with Mexican Financial Reporting Standards, which differ in certain respects from U.S. GAAP.  Notes 26 and 27 to our consolidated financial statements provide a description of the principal differences between Mexican Financial Reporting Standards and U.S. GAAP as they relate to us, together with reconciliation to U.S. GAAP of net income and equity.

Average Price Per Unit Case.  We use average price per unit case to analyze average pricing trends in the different territories in which we operate.  We calculate average price per unit case by dividing net sales by total sales volume.  Sales of beer in Brazil, which are not included in our sales volumes, are excluded from this calculation.

Effects of Changes in Economic Conditions.  Our results from operations are affected by changes in economic conditions in Mexico and in the other countries in which we operate.  For the years ended December 31, 2011, 2010, and 2009, 35.7%, 37.5%, and 35.8%, respectively, of our total revenues were attributable to Mexico.  In addition to Mexico, we also conduct operations in Central America, Colombia, Venezuela, Brazil and Argentina. 

Our future results may be significantly affected by the general economic and financial conditions in the countries where we operate.  Decreases in economic growth rates, periods of negative growth, devaluation of local currencies, increases in inflation or interest rates and political developments may result in lower demand for our products, lower real pricing or a shift to lower margin products or lower margin presentations. 

The Mexican economy continues to be heavily influenced by the U.S. economy, and therefore, further deterioration in economic conditions in, or delays in recovery of, the U.S. economy may hinder any recovery in Mexico.  In addition, an increase in interest rates in Mexico would increase our cost of Mexican peso-denominated variable interest rate indebtedness and would have an adverse effect on our financial condition.  Depreciation of the Mexican peso relative to the U.S. dollar increases the cost to us of a portion of the raw materials we acquire, the price of which is paid in or determined with reference to U.S. dollars, and of our debt obligations denominated in U.S. dollars and thereby may negatively affect our financial condition. 

Recent Developments

As previously announced by the CNBV, commencing in 2012, all Mexican public companies must report their financial information in accordance with IFRS.  Since 2006, the Consejo Mexicano para la Investigación y Desarollo de Normas de Información Financiera (Mexican Board of Research and Development of Financial Reporting Standards) has been modifying Mexican FRS in order to ensure their convergeance with IFRS.  As required, starting on January 1, 2012, we are reporting our financial information in accordance with IFRS on a comparable basis. 

On December 15, 2011, the Company entered into an agreement to merge the beverage division of Grupo Fomento Queretano into the Company. Grupo Fomento Queretano’s beverage division operates mainly in the state of Queretaro, as well as in parts of the states of Mexico, Hidalgo and Guanajuato. The merger agreement was approved by both Coca-Cola FEMSA’s and Grupo Fomento Queretano’s boards of directors and is subject to the approval of the Mexican Antitrust Commission, and the shareholder’s meetings of both companies. The transaction will involve the issuance of approximately 45.1 million of the company’s newly issued series L shares, and in addition the company will assume Ps. 1,221 in net debt. This transaction is expected to be completed in second quarter of 2012.

In February 2012, our Board of Directors proposed an ordinary dividend of Ps. 2.77 per share outstanding on the payment date, which, at the time of filing, is ancipated to be May 30, 2012. This dividend was approved at the Annual Shareholders’ meeting on March 20, 2012.

In February 2012, we entered into a 12-month exclusivity agreement with The Coca-Cola Company to evaluate the potential acquisition of a controlling ownership stake in the bottling operations owned by The Coca-Cola Company in the Philippines. We remain in the process of evaluating this potential acquisition.

On March 29, 2012, we issued a press release containing Non-Audit Financial Results for the year 2011 prepared in accordance with Mexican FRS and translated to IFRS for comparison purposes.

Critical Accounting Estimates

                The preparation of our consolidated financial statements requires that we make estimates and assumptions that affect (1) the recorded amounts of our assets and liabilities, (2) the disclosure of our estimates of assets and contingent liabilities as of the date of the financial statements and (3) the recorded amounts of revenues and expenses during the reporting period.  We base our estimates and judgments on our historical experience and on various other reasonable factors, which together form the basis for making judgments about the carrying values of our assets and liabilities.  Our actual conclusions may differ from these estimates under different assumptions or conditions.  We evaluate our estimates and judgments on an on‑going basis.  Our significant accounting policies are described in Note 4 to our consolidated financial statements.  We believe our most critical accounting policies that imply the application of estimates and/or judgments are:

Allowance for Doubtful Accounts.  We determine our allowance for doubtful accounts based on an evaluation of the aging of our receivables portfolio.  The amount of the allowance is based on an analysis of recoverability of each balance.  Most of our sales, however, are realized on a cash basis and consequently do not give rise to doubtful accounts.

Returnable and Non-Returnable Bottles and Cases.   The Company has two types of bottles; returnable and non-returnable.