Fomento Economico Mexicano SAB de CV
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Fomento Economico Mexicano SAB de CV
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Good morning, and welcome everyone to FEMSA's Fourth Quarter and Full Year 2018 Financials Conference Call. [Operator Instructions]
During this conference call, management may discuss certain forward-looking statements concerning FEMSA's future performance and should be considered as good faith estimates made by the company. These forward-looking statements reflect management expectations and are based upon currently available data. Actual results are subject to future events and uncertainties, which can materially impact the company's actual performance.
At this time, I would like to turn the conference over to Edward Padilla (sic) [ Eduardo Padilla ], FEMSA's Chief Financial Officer (sic) [ Chief Executive Officer ]. Please go ahead, sir.
Good morning, everyone, and welcome to FEMSA's Fourth Quarter and Full Year 2018 Results Conference Call. Juan Fonseca and Maria Dyla Castro are also with us today. And I'm happy to welcome Daniel Rodríguez Cofré, CEO of FEMSA Comercio, who is also joining us for this call to discuss the exciting news we communicated last Tuesday regarding OXXO and the beer category. As we usually do, we will focus the call on the consolidated figures for FEMSA and for -- on FEMSA Comercio results, since many of you probably had opportunity to participate in Coca-Cola FEMSA's conference call last Tuesday. We want to use today's call to try to add some color and some qualitative elements to the discussion as well as to hear your views and answer your questions.
Our fourth quarter results were generally consistent with the performance trend set earlier in the year. FEMSA Comercio Proximity Division achieved double-digit growth up and down its income statement, delivering stable operating margins in the back of strong expansion at the gross level. The Health Division generated mid-single-digit growth and stable operating margins, and the Mexico operations continued to improve sequentially.
The Fuel Division delivered solid growth in revenues and growth margin, but we were unable to carry that strength down to the operating line. For its part, Coca-Cola FEMSA delivered top line and volume growth in several markets with particular encouraging trends coming out of Brazil.
Before we discuss the quarterly results in more detail, Daniel will comment on the announcement regarding the new commercial agreement between OXXO and the 2 global brewers that operate in Mexico. Daniel, please go ahead.
Thank you, Eduardo. As you probably know by now, after 9 very positive years of working closely with Heineken and carrying only their brand portfolio in our OXXO stores, starting this time in April, we will begin a gradual process to open our coolers and shelf to the portfolio of Grupo Modelo. The process will take the better part of 4 years so that by the end of 2022, every OXXO store in Mexico will be carrying the brands of both brewers. It is an important step in OXXO's permanent commitment to our consumers, always trying to provide them with the broadest product assortment to satisfy their daily needs and always working to enhance our value proposition.
While we are not providing financial details of the new commercial agreement, we are confident that they will allow OXXO to increase the productivity of this key category. The agreements that were signed last Tuesday will be formalized by definitive contracts that we expect will be executed in the coming weeks.
Now I would like to return the call to Eduardo.
Thank you, Daniel. Moving on to discuss FEMSA consolidated quarterly numbers. Total revenues during the fourth quarter increased 7.5%, and income from operations increased 2.3%. On an organic basis, that is excluding the results of the operations in Guatemala and Uruguay at Coca-Cola FEMSA and Caffenio at the Proximity Division. Total revenues increased 6%, and income from operations decreased 4.4%. Net income increased significantly reflecting an easy comparison base caused by the charge in the accounting method for Coca-Cola FEMSA Venezuela operation during the fourth quarter of 2017 coupled with higher interest income during the quarter. This was particularly (sic) [ partially ] offset by a decrease in foreign exchange gains related to FEMSA's dollar-denominated cash position. Our effective tax rate was 26.1%.
In terms of our consolidated net debt position, during the fourth quarter, it decreased by approximately MXN 15 billion compared to the previous quarter to reach a net debt of MXN 60 billion at the end of December, reflecting the proceeds from the sale of Coca-Cola FEMSA's Philippine operations coupled with a reduction in Coca-Cola FEMSA's debt.
Moving on to discuss our operations and beginning with FEMSA Comercio Proximity Division. We opened 521 net new OXXO stores during the fourth quarter, reaching 1,422 net store openings for the last 12 months. This figure includes new stores in Mexico, Colombia, Chile and Peru. Revenues for the division increased 11% on organic basis. Revenue grew 10%. OXXO same-store sales were up 4.5%, driven by a 4% increase in average customer ticket and 0.5% growth in store traffic. These numbers reflect a resilient consumer environment in Mexico, coupled with positive pricing initiatives and the continued strong performance of the services category.
Moving down the income statement. For the fourth quarter gross margin expansion was quite strong at 300 basis points, reflecting: number one, sustained growth of the service category, including income from financial services; number two, healthy trends in our commercial income activity; and third -- and number three, increased and more efficient promotional programs with our key supplier partners.
Income from operations increased 11.1% on organic basis. It increased -- I'm sorry, increased 11.1%. On an organic basis, it increased 6.4%. Operating margins remain flat, in line with our expectations in spite of: number one, our continuing and gradual shift from the commission-based store teams to employee-based teams. Now we have close to 52 to 48 -- 52 employees and 48 commissioners; higher secure cash handling costs driven by increased volume and higher operational costs including fuel prices; and number three, an increase in electricity tariffs during this quarter; and four, a step up in the pace of organic growth of OXXO's international operations, which have yet to reach the desired scale. And we are very happy with the performance in Colombia, Peru and Chile. It seems like we learned our lessons in Colombia, and we are applying now for Chile and Peru.
Moving on to FEMSA group Comercio Health Division. We added 58 drugstores during the quarter to reach 2,361 units across the territories at the end of December and 136 total net new stores for the last 12 months. Revenues increased 6.1%. Same-store sales increased an average of 4.5%, which includes a negative currency translation effect from depreciation of the Mexican peso compared with Chilean and Colombian pesos.
Gross margin contracted by 30 basis points for the fourth quarter, while operating margin remained stable, reflecting the gradual improvement of our operations in Mexico as well as increased operating leverage from our cost efficiencies and tight expense control.
For its part, FEMSA Comercio's Fuel Division added 20 gas stations during the fourth quarter to reach 539 units at the end of December and 87 net new service stations for the last 12 months. Same station sales grew 6.7% in the fourth quarter, and gross margin expanded 280 basis points, reflecting improved supply terms. Operating margin contracted by 30 basis points year-over-year, reflecting provisions related to certain unprofitable institutional clients; number two, higher wages implemented to reduce turnover in a tight labor market; and number three, increased marketing initiatives; and four, expenses related to the remodeling of our stations and the installation of new environmental controls.
Finally, moving on briefing to Coca-Cola FEMSA. As John highlighted in the press release yesterday, Mexico and Central America's top line continued to grow, while a recovering environment and a strengthened portfolio helped to deliver volume growth in Brazil during the fourth quarter. Coca-Cola FEMSA also strengthened its balance sheet by reducing its net debt. If you were unable to participate in Coke FEMSA conference call, you can access a replay of the webcast for additional details on the results.
Finally, let me take a little about the year that begins. While the macro environment is producing some mixed signals in Mexico, we continue to see a resilient confident consumer in our primary market and a resurgent consumer in Brazil. We are optimistic about most of the markets that we operate across businesses. But most specifically, let me share with you some broad directional expectations for our main operations.
For FEMSA Comercio Proximity Division, we expect net OXXO openings to be in line with 2018. So more than 1,300 units in Mexico with some upside potential as well as try to improve on the previous year's number.
For OXXO international, we expect to have approximately 120 net new stores among Colombia, Chile and Peru, reaching close to 280 total stores in South America by the end of this year. As you know, we have made strides fine-tuning the value propositions in each of these markets, and as we are -- and as we gradually scale these operations up, they should then cease to put pressure on our margins and eventually begin to contribute to our profitability.
In terms of OXXO's same-store sales growth, we should remain with our long-term expected range of mid-single-digit growth. Operating margins will be under a bit of pressure, particularly given the increased pace of store growth in South America. However, we should see some upside from the gradual implementation of these new agreements with Heineken and Modelo. Also, we know there are many moving pieces regarding public policy as they tend to be in the first year of a presidential administration, so this adds a bit more uncertainty to the mix.
Finally, there is also timing component that we need to be aware of given that Holy Week will shift from March last year to April this year. And this improves OXXO's prospects for the second quarter and tempers expectations for the first quarter.
For FEMSA Comercio Health Division, in Mexico, we'll continue to provision improving profitability over accelerating our unit growth, while increasingly leveraging our consolidated operating platform with our suppliers and customers. South America, we expect a strong year, particularly in Colombia. We expect same-store sales for the division to grow in the mid-single digits after adjusting for currencies. In terms of margins, we should also see stable growth -- see stable to slightly expanding operating margins. Also, we are still waiting for the regulatory approval for the acquisition of Corporación GPF in Ecuador, which we expect will be happening soon. As you may remember, this acquisition will add approximately 620 new stores to the Health Division.
For the Fuel Division, we see it expanding at a 15% to 20% rate in terms of added service stations in 2019, always expanding through our asset-light approach, which revenues growing double digit and stable operating margins. Having said that, as you know, there was a significant disruption in the supply chain earlier in this year, and there is always the possibility that something like that will happen again. So there is some added uncertainty in the short term, but no change in our -- to our medium- and long-term positive outlook for this business.
In terms of dividends to be paid with 2019, we will be submitting to shareholders our proposal for an ordinary dividend payment of MXN 9.7 billion, representing a full pass-through of the dividends from the Heineken and Coca-Cola FEMSA as well as a portion of the free cash flow generated by FEMSA Comercio in 2018, consistent with the mechanics of recent years. This proposed amount represents an increase in line with the general inflation in Mexico and is consistent with our view that our -- that the current macroeconomic environment calls for a conservative approach to balance sheet management.
Now for capital expenditures expectations, we are modeling 6% of revenues for Coca-Cola FEMSA and FEMSA Comercio Proximity; 3% of revenues for health; 2% of revenues for fuel; and approximately $100 million for the logistics and refrigeration operations.
Summing up, we are cautiously optimistic on the consumer environment in our main market, and we are confident in our ability to execute on our strategy and to keep using the levers that are within our control. We're also cognizant of our high-quality challenge as we continue to work to gradually allocate our capital to higher-return opportunities, exercising discipline as we grow our platform across markets with a view on long-term value creation.
And finally, let me turn the call over to Juan for a technical note.
We just wanted to note that beginning in the first quarter 2019, we will be reporting our financial information under IFRS 16, which, as you know, changes the way that we treat leases in our financial statements. We will put out a special press release in late March, presenting our 2018 quarterly and full year financials according to IFRS 16 and detailing the relevant adjustments so that you can all incorporate these changes into your models well ahead of our first quarter results in late April. This is very similar to what we did back when we adopted IFRS for the first time, and it seemed to work well.
So with that, we can open the call for your questions. So operator, please?
[Operator Instructions] Our first question comes from the line of Luca Cipiccia from Crédit Suisse.
Is it me, no?
From Goldman Sachs.
Actually, my one question would be on the OXXO results in the fourth quarter. I think that you commented on the very impressive gross margin expansion, and I think you were quite clear in attributing that to the contribution from severances -- service revenues, better supplier terms, some of the things we heard about in the past. But in terms of the market, this contribution is becoming more and more visible as well as the actual size of the improvement. So anything more that you can share on that front? Also maybe with a tie to the recent announcement of the -- on the beer side of the business. So that would be the first part of the question. How we should we think about it going forward and in relation to the -- this announcement? And secondly, clearly, we've seen that sort of cross between gross margin expansion, operating profitability not growing as fast because of the investments that you're making in SG&A and personnel. When will that process be, if not over more or less, sort of annualized? And we should see maybe a more aligned profitability trend between gross margin, operating margin.
This is Eduardo. Basically, I would say for the year, one thing that we were impacted is really the handling of cash. The handling of cash was a major impact. Currently now out of every MXN 5 that we have in the cashier, MXN 1 comes from the merchandising and MXN 4 comes from services and payments. So a business that we considered that was going to be a marginal business now is a main business for us. And I think the managing of cash really -- even though we know how to manage, and we basically take the cash daily out of the stores, I think there are some opportunities to rethink and redesign the way to do that. And I think we will be confident that probably not immediately, but probably in a year's time, we will be able to come up with a better system. Because in a way, it took us by surprise the amount of cash that we were managing, and it was no longer marginal and the cost of managing cash went up dramatically. But I will say probably out of the first question you asked, I would love to give you this perspective. To Juan?
Yes. No, I would also like to add. When you look at the gross margin expansion, I would mention a couple of things. One is our ability to leverage the ubiquity of the stores with suppliers, I think, is something that continues to grow and is somewhat structural. I think when we talk a little bit about the new agreement with the brewers, I think that will be a component. I mean, it's something down the road, so it has nothing to do with the 300 basis points of the fourth quarter. But down the road, I would expect both brewers to also contribute on that front. But when you look at seasonality, the fourth quarter tends to be a big one in terms of commercial income, right. This is probably the best quarter of the year when you receive help from suppliers to get their brands and their promotions out in the market.
And the other component, which is not structural, and it's really more of a one-off but it is relevant this quarter, is the consolidation of the coffee business of Caffenio in the sense that it helps you at the gross but it also hurts you down at the SG&A. So ex Caffenio, the numbers would look a little bit more like what they used to. And obviously, we're going to cycle the consolidation of Caffenio in a couple of more quarters, and that should not be an issue anymore.
Understood. And maybe on those investments that you're making on the shift in the operating model at the OXXO stores, how far ahead are you in that process? You've been talking about it for a while.
Luca, this is Daniel Rodríguez. I mean, as Eduardo mentioned earlier in the call, we are roughly 52% now with the right employees. So that is something that we will continue moving into that direction, but we understand that that's something that needs to work as a system. Most probably now, we are more concentrated to do those changes on a regional basis, okay. So we will continue moving into that direction, but with a much more focus on trying to concentrate in specific regions where we will have, I mean, the right employees for a particular region and then step forward.
Your next question comes from the line of Antonio Gonzalez from Crédit Suisse.
I wanted to ask Eduardo, we are approaching the second year anniversary of the partial divestment in Heineken and, yes, it sorry to say that since then, the regulatory visibility in Mexico has arguably worsened in some of the businesses that you would like to invest. And the opportunity is full in Brazil, right, the macro environment is certainly improving, and there's a lot of expectations of further improvement as well, no. So I wanted to see if you can share your big-picture thoughts on: A, how would you describe your increased appetite, if there is such for assets in Brazil, specifically? Are you more are flexible in terms of formats and businesses that you would like to invest in? And is there also a longer timeframe, because conditions have changed, that you are now considering for deploying the capital, whether it's on Mexico or on Brazil? Is it just a longer timeframe now than it was before? And then secondly, if I may, just super quickly taking advantage of Daniel's presence, is there any early indication that you might share on the beer deal? I know that beer is roughly contributing roughly mid-teens to your OXXO revenues at the moment. Is there any order of magnitude that you can give as to how much more beer revenues you expect on a per-store basis? And perhaps, what's the white space in terms of number of new stores that this would open once fully deployed?
Well, let me tell you about the Brazil question you raised. We are considering some investment opportunities in Brazil in the small-format businesses. The thing is that really, even though Brazil is of much interest to us, there are some -- well, things are very expensive, and we already have, I mean, our greenfield operations that we set up in Peru, Colombia and away in Chile are -- we are very much focused in coming up strong out of those investments. So in Brazil, we're considering some small-format investments. Probably, I hope in 6 years -- in 6 months -- or 3 or 6 months, we'll be able to come up with something. But I think we are very present in Brazil in how to approach the market. Again, a great market but sometimes difficult one and -- as we have learned from our operations in the Coca-Cola and logistics business.
Regarding to your question about beer, Daniel, would you like to add anything?
Sure. Well, I mean, I mentioned at the beginning of the call, we are not communicating any financial terms or expected impact on our results. Having said that, I mean, we know that having the transition until we have both brewers in our stores will take, I mean, almost 4 years. So we will see an impact, which will be gradual, Antonio, and we will start, I mean, in areas like Guadalajara, Mexico City. We will leave the northern part of the country for the -- at the end of the 4 year period. So definitely, while we are expecting there will be we start the -- there will be an increase in the proximity of the beer category, and we expect obviously to sell more cases per store. But that is what I can share at this stage because, I mean, it's very early in the process.
But Daniel, what did you say in the -- the density of stores, how many do you -- I think that is a good indication of how -- why we are very optimistic about this.
Yes. I think -- I mean, I'm always trying to say that if you compare, I mean, the share of the brewers in the country where Heineken has a large share of the market, we have roughly, I mean, one store per 3,000 habitants, okay. And we know that indicates for Modelo, I mean, that's the largest market share. Today, we have 6,000 habitants per store. So that gives you a flavor about, I mean, the potential that we have in terms of the organic growth.
Our next question comes from Alan Alanis with UBS.
My question has to do with how should we think about the improvements in profitability and changes in traffic, that's the top line growth of OXXO in light of the new agreement with Grupo Modelo and with Heineken? I mean, I know it's positive, but how should we be thinking about it?
I will be optimistic, Alan. But really -- not really big because as we said, we are going -- we are going to learn a lot on the second quarter because we will be opening up at Mexico City and Guadalajara. Mexico City, the Heineken's brands preferences are very low compared to Modelo's; and the same is happening in Guadalajara. So I think those will be a very important test market for us and -- because, well, now we'll have the full flavor of beers in the portfolio on the shelves of the store. So...
Yes. And I mean, I will support Eduardo on that. I think most probably, I mean, after a couple of months that we started, I mean, the mix in Guadalajara and Mexico City, we will have a much better sense of what will be the impact in terms of our finances in these 2 regions, okay. And at this stage, I feel that it's very early to try to do any kind of projection in terms of the impact, even though that, as Eduardo said, we are very optimistic.
And no, on the other end, for us emotionally speaking, it's very shocking. We've been fighting against Modelo brands for all our lives and now we happen to have it. And this is me speaking, but I was thinking perhaps of the whole, complete organization. We are shocked. We are amazed, and we are just grabbing the -- swallowing this new environment that we will be facing. So in a way, emotionally speaking, it's been shocking for the whole organization. On the other end, we are being very rational in order to be very connected to the consumer, and I think that's the path to go.
Got it. No, that's understood and it makes a lot of sense to wait until you have some source in Mexico City and Guadalajara to see what's going to be the impact on the overall traffic and the profitability of the store. So let me reframe the question slightly different just for modeling purposes on our side for our work. Was there any upfront payment? I know you cannot disclose it. But should we be expecting some onetime extraordinary payment from both Heineken and Grupo Modelo on the first quarter results? Or this will be embedded in the price, which you're purchasing the beer and we will see it through time.
Alan, it's Juan. It's the latter. So you can't expect any upfront. This is something that will manifest itself as the weeks and the months go by. But I will also highlight something. I mean, if you think about it, right now in Guadalajara and for the -- forever basically, very few people, in the greater scheme of things, have gone to OXXO because they want beer, right. I mean, they go to OXXO for a lot of other reasons, but if they are fans of Estrella or one of the Modelo brands, which 2 out of 3 or 3 out of 4 probably is the case, they haven't been going to OXXO when they have a need for beer as kind of the primary driver for that visit. And that will change, and that will change quickly. And I'm sure there's going to be a lot of promotion and media, and I'm sure Grupo Modelo is going to do a great job in communicating this, and I'm sure we're going to do it, too. So in those markets, the impact will be fast, it's my guess. But for this to move the needle of the whole country for the consumers everywhere -- and as Eduardo and Daniel said, I mean, for this to happen in the north, it's going to be a few years. So as far as our national numbers, you're going to see it very gradually. But if you focus on some regions, it's going to move the needle rather quickly.
The second quarter will be very important.
Yes. In terms of what we observe, I mean, the trends that we...
What we learned. And again, it will be a learning process because we don't know really how to manage these brands. The logistics will be in place. I think really, this is going to be a learning process.
Comes from the line of Robert Ford with Bank of America.
Eduardo, how are you thinking about the crackdown on fuel theft and the enforcement actions of participants in the gasoline -- or in the gas station space? And what implications does this disruption have? And you're suggesting that there may be others. But what implications does it have on your storage investments? And do you think this creates new consolidation opportunities for you in the gas station space? Or is this administration ruling out the possibility of selling these out to companies they deem to be oligopolistic?
Okay. Eduardo here. Let me give you a brief comment, and I will let Daniel to speak about it. We are in the progress of converting all these stores to the -- to our brand and to enhance the value proposition. We -- our only source of supply comes from Pemex, and we are very much well aligned with Pemex. We are understanding how these new players come and how is really the value proposition may come into play. And our main value proposition in the market was our honesty, and we deliver liter by the liter. But that's why it is important now for us to convert all the store, all these stations and to have the full brand of OXXO GAS in that place. We don't know how these new operators will come, how they will be enforced the new -- well, the value proposition of the other brands. We don't know yet what is happening. However, what we have seen is that there will be a lot of opportunity because there are a lot of people who doesn't know how this game is going to played, and I think we could leverage ourselves of our scale and our learning process and the value of our brand. So really, it's moving a lot and, in fact, all this disruption that we have in January was a difficult one. But again, we are very committed to our value proposition and to our brand. But we are in the process of learning what will come next. I don’t know if you have any -- you want to add, Daniel?
No, I think that's fine. I mean, maybe on a more -- if you want the big view, I mean, all the indications that we are getting today, I mean, from the new authorities is that the energy reform, I mean, the key tenets of the energy reforms will remain in place, which I think that's a positive one. Second, on the supply side, definitely, I mean, Pemex will be our lone payer, and we rely on them. And so far, I mean, the thing is -- I mean, all the supply is working well. And we should not forget that in Mexico, there are roughly, I mean, 12,000 gas stations. I mean, we are a little bit over 500, and we are, I mean, the largest operator. So definitely, we see that there is an opportunity there in terms of increasing our size, and we see that as I mean, very, very optimistic.
In terms of the competition, which was the pain point that Eduardo was referring to, I mean, we know that, obviously, all the global players, they have very strong brand. But we also -- we recognize that we have a, I mean, a very strong brand here in Mexico, which is OXXO. So we know that we can leverage that brand, and we know that in terms of the consumer, we need to focus definitely to keep having our value proposition in terms of demand fee, as Eduardo said. But on top of that, we're also focusing on how we can improve and maybe differentiate ourselves from the whole division in terms of the service that we provide. I mean, we should not forget that we also -- all the employees that work at the gas station, they are the right employees from us. So we have a different model from the global players, which I mean, for us give us much more tools in order that we can really deliver our customer value proposition.
No, that's helpful. And then just one question to fill out the beer picture, and that is what percent of OXXO revenue is in the area of Guadalajara? And I assume it's not just the city. There's the city but it's the metro -- the major metropolitan area. Well, but what percent of OXXO revenue is coming from the regions of Guadalajara and Mexico where the beer category is going to open up?
Rather than touch by revenue, in terms of number of stores, I mean, of the roughly 18,000, probably a little bit over 3,000 are close to metro areas, so that would...
Basically, the agreement with Heineken and Modelo is that we are starting with the center part of Mexico, and the last one will be probably in Monterrey.
Our next question comes from Álvaro García with BTG.
My question is on clarifying the operating margin guidance for this year in your Proximity Division. You mentioned operating margins would be under pressure. I'm assuming on an organic sort of ex-beer basis, but the beer deal could benefit. I was wondering if you could just comment on -- like excluding the new beer deal, what would you have expected for 2019 in terms of operating margin?
Yes, Alvaro, this is Juan. I think if we did not have the deal, I would have said flat to slightly contracting. I think the international component, we -- like I said, we have big, aggressive targets percentage-wise for all 3 markets and, of course, those operations are -- none of them really have the scale to really absorb their overhead yet. Especially Peru, we just started, but we're starting fast, that was Eduardo's original comments at the beginning of the call. Things are looking quite good in Peru. So we are going to keep the foot on the accelerator, but that definitely puts some pressure on the margin. So I would say ex the beer agreement, probably flat to slightly down. Now that we have those agreements signed, I would say there is some upside risk that maybe will allow us to come out with stable margins. And we'll kind of play it by ear. So as the year goes on, we'll obviously fine-tune the expectations, but that would be my thinking right now. And I see Daniel is nodding his head, so that gives me comfort.
Yes, I agree. I mean, I think that really was what we were expecting. I mean, nothing else to add.
No, that's very clear. And then just one quick follow-up on that. I was just wondering if you could comment on the growth that you've seen in the services -- in the financial services category in the quarter or throughout the year at OXXO.
I think it keeps increasing. And we're very much dependent on how much cash is in the economy. So if -- we have seen that cash is not being introduced in Mexico and convenience of paying everything in a 24/7 basis is always helpful. And we're confident on the category.
Yes, and maybe just one additional comment, that we also recognize and we are working on -- as we can, expand the service that we provide to our customers by the digital strategy. I mean, how we can also satisfy financial services through our tools. So we are, again, optimistic in terms of the growth of that part of the business, but we also are working on how we can move faster in terms of our digital strategy.
Our next question is Alex Robarts with Citigroup --
I wanted to start out perhaps by getting your view just on some of these macro changes that have started this year in the Border States. I mean, specifically, we see the changes with VAT, significant reduction there in the Border States, together with this -- it doubling, right, of the minimum wage in that same border state area. How are you guys thinking about the impact on your consumers on your OXXO customers in this first part of the year? Is it marginal? Or is it something that you think could really have a more meaningful impact as we think about the same-store sales trends? And I guess, my follow-up would be just on the Amazon joint venture. You've, I believe, mentioned 4,000 stores could be kind of a short-term goal to have that joint venture operating with. And are we close to 4,000 stores? Have we passed it? And just kind of your thoughts on the rollout of that joint venture during this year, that would be great.
Well, the -- I think what is happening in the border, already the labor market was very tight, and we are optimistic that there will be a lot of money in the border, without doubt. But on the other hand, we have also to compensate our labor force in order to compete in this very tight labor market. So we are learning about it. We are optimistic about it. And I will say that the net debt -- there will be a net benefit out of what is happening at the border. That will be my opinion. I don't know if you want to add anything there.
No, I think you're absolutely right, Eduardo. I think et-net, I mean, it will be a positive impact. I think it's very early in the year to see, I mean, what is the size of that impact. But to Eduardo's comment, I think one of the main challenges that we have from our side is how we are very competitive in order to keep the labor force, I mean, at our stores. So conceptually speaking, obviously, there will be high revenue, I mean, definitely, so higher consumption. So in that regard, we are very positive.
And maybe, if you want, I can comment on Amazon. I mean, clearly, we are today, I mean, between 3,000 and 4,000 stores that we are delivering Amazon products. I mean, we don't have the restrictions in terms of what would be the final numbers. But there is a challenge coming from the Amazon side of how they can -- if you want to provide the product at our stores, so it's more a logistic challenge that we see in front of us. But so far, the reason and the commercial agreement is proving to work well.
Yes, and I think -- this is Juan. What we had mentioned in the last call is that the only constraint is really how fast can Amazon logistics deploy this -- their own coverage in other parts of Mexico. And so any city or any town where Amazon gets to, those OXXO stores should have the capability. So that -- we will continue to progress according to the speed with which Amazon grows their own footprint in the country.
Our next question is from Martha Shelton with Santander.
My question is regarding OXXO international. I wanted to see if you could clarify the number of stores that you have in OXXO international at year-end. And then I just wanted to clarify is it that -- are you growing your store footprint by 77% or 80% year-over-year? So that's one question that I have for you. And then secondly, in terms of long-term growth algorithm for OXXO international, how should we think of growth in OXXO international over the long term? And then just to kind of tie that up, in terms of long-term margin assumptions, I can't imagine that we will see something profitability wise that's similar to OXXO Mexico anytime soon, but can you give me a sense for how you're thinking about how EBITDA margins for OXXO international could evolve over the medium to long term?
Martha, this is Juan. In terms of the numbers, we closed the year with about 160 stores outside of Mexico, and you're right that, given that we're talking about 120 for the year, that's a pretty aggressive growth objective. But that is what it's looking like. We are very optimistic. I mean, it took us a while, to Eduardo's earlier point. It took us a while to get going in Colombia to get the value proposition to the point where revenue per store was what it needed to be, and then it's really just a function of scaling up to better absorb the fixed costs and the overhead. I think in Chile it was a different trajectory in the sense that we acquired an asset, and it's really been more of an adjusting the value proposition to something that is more like in terms of improving the assortment and increasing the number of SKUs and then tinkering with the price. And then the most recent newcomer, which is Peru, where we've basically been for a few months, but it's gotten off to a very strong start. Interesting factoid, prepared food plays a much bigger role in the Peruvian stores. Chicken, interestingly, is an important part of the menu, and it's flying off the ovens or the rotisserie. So learning a lot very quickly, and I think the time that it takes us to iterate and then decide upon and adjust the value proposition, that the timeframes have compressed significantly. So I think we've gotten better at making adjustments.
In terms of the profitability, I mean, I'm going to turn it over to Daniel. But certainly, scale, scale is something that -- I mean, the numbers that we've come to evolve at OXXO have a lot to do with the fact that we have thousands and thousands of stores, and so it's going to be a while. I wouldn't even put it in the same sentence. But certainly, you can get your margins to begin to close that gap relatively quickly. You need a few hundred stores, is what I have in mind.
Yes, yes, fully agree with Juan. I mean, mainly, I think, in terms of the growth and the expansion, we recognize that scale is very relevant. But having said that, we know that it's more important that we have a very, I mean, quality growth strategy. One of the things that we are doing is trying to measure how the performance of same stores in order that one can really learn how to speed up the value proposition. Because once you get a profitable store, then it's much easier that you can speed up the expansion. So that is an area where we are really focusing now. And to Eduardo's comment early in the call, we are, obviously, taking advantage of the learnings that we had in Colombia and also, the learnings that we have in Chile. Because there were 2 different entrance approach: one was greenfield, and obviously, that is much more painful. And the second one, because we acquired a very nicely located chain of convenience stores, but very convenient in terms of the price, and we really want to develop a much more proximity approach. And that, we have changed the brand and also changed the value proposition. So far, it's proven to work well. But in terms of profitability overall, we need to create a scale. But for us to create the scale, it is to make sure that we have the right stores, the right location and with the right customer value proposition. And that is the main focus today.
Great. And just to clarify, when you're talking about your EBIT margin expectations, flattish EBIT margin, a bit under pressure but flattish EBIT margins in 2019 versus 2018 -- and that accounts for, of course, the growth of the lower-margin OXXO international. The way I am reading your comments, it sounds to me like it might be you're thinking about perhaps small incremental traffic that comes from Modelo brand loyalist share. But it sounds to me the -- what I hear is it could, in fact, be the benefits from the commercial income that you get from Modelo and Heineken. Is that a fair assessment of how I should think about 2019 in terms of the OXXO -- the Proximity Division's income statement?
I think it's been the algorithm for a while, right, where you have a very strong margin expansion at the growth level. And then a portion of that -- sometimes most of that goes away in the SG&A because of electricity and labor and cash management or cash handling costs. And I think, you're right, when we factor in the beer, the new beer agreement, certainly, as part of that should grow to commercial income, but a part of that should also come from incremental beer sales, especially, as we said, in the center and the rest of the country. So these numbers obviously do include the South American operations, international operations. But I do think the upside risk from the Modelo agreement is a bit of a question mark, right. I mean, we obviously have our own internal projections, but we will keep you guys posted quarter-after-quarter in terms of how that is tracking, because I think it does have the potential to move the needle, and we could be talking about stronger margins at the end of the year. But we'll have to wait and see how it goes.
Our next question is from the line of Carlos Laboy with HSBC.
Two quick questions. The first one is, are there any features of the new agreements that allow you to maybe phase in earlier or later the north of Mexico and -- for ABI? And then the second question is the craft beer segment, I know it's very nichey, but can you expand on whether this allows you to also service the independent brands? And at what kind of a pace might that be possible?
Yes, well, I mean, first of all, the agreement that we reached with both breweries is a comprehensive one, okay. So that means that we have negotiated commercial conditions, but also the way that we will start to mix in the regions along the country. And that is part of the agreement. So there will be no changes from what we have already agreed. So this goes to your first question.
The second one, obviously, once we have the mix territories, then we are open to have any product that we want on our shelves. So that is the straight answer to your question. So definitely this year, we can have craft beer in Guadalajara, and we can have that in Mexico City as well.
They will follow the same path that we'll be following.
[Operator Instructions] And there are no further questions in the queue.
Well, thank you very much, guys.
Okay. Thanks, everyone, and have a great weekend.
All the best.
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