Current market situation
A consumer spending boom is currently sweeping across Mexico and it looks like it is here to stay. The Mexican retail sector has been growing steadily since the global recession in 2009 and it has kept pace despite government spending cuts, faltering consumer confidence and recent tax reforms generating tightened fiscal conditions. The spending binge is surely dependent on several different factors but we have identified three areas as key factors for this development. Firstly, Mexico has had a historically low inflation rate and it reached a record-low 2.1% in December 2015. Secondly, information from the International Monetary Fund (IMF) shows a boost in private credit and since January overall nominal private credit has grown by a remarkable 19.5% on average. Thirdly, there has been an upsurge in remittances due to the strong US dollar and conversely depreciating Mexican peso. Between January and June the remittances in peso terms were up by an astonishing 30%, in comparison to an increase of 8.9% in remittances in US-dollar terms for the same period.
The rise of disposable income
Mexico is a hybrid country where world renowned companies like Walmart share the street with pop-up kiosks. Even though the presence of traditional “village shops” is significant, the retail sector is mainly dominated by a number of major players like OXXO (drugstores) and Liverpool (department stores). According to information from ANTAD, one of Mexico´s main retail organisations, retail sales grew by a nominal 10.6% during the January-July period of 2016 and the retail sector is set to keep growing due to several factors. Mexico is a large country with a massive population forecast to (officially) reach 125 million by the end of 2017. The middle class is growing steadily and the country has a young population that drives consumption. The number of young childless couples with high disposable income, also known as DINKS (Dual Income and No Kids), has nearly doubled since 2005 and for them exclusivity and way of life that known brands project is primary, while price is no longer the main concern. It is also positive for the retail sector that more women are attaining employment, translating into more high-potential customers for retail companies. As a result of the positive outlook, Mexico´s retail sales are projected to reach 265 billion US dollars in 2017 – a rise of 17.8% since 2013.
Ever since Donald Trump came out on top in the US elections in the beginning of November 2016, there has been widespread uncertainty about the impact that the new US administration´s policies will have on Mexico. The concern is understandable and warranted, given Mexico´s close commercial ties with its neighbour in the north. As a result of the outcome of the elections the Mexican Peso has jittered at around 20 MXN to a USD, and the depreciation could have a negative impact on the Mexican´s spending tendencies, but there is positive news as well. Some experts maintain that Mexico has pressed the accelerator on domestic consumer demand. People in the northern states of the country are no longer crossing the border for shopping and in December 2016 this resulted in year on year growth of up to 100% for some consumer goods segments in Mexico. Given recent events, could it well be that we will now see a reverse shopping tourism flow of Americans crossing over to Mexico for better deals on certain necessities?
Getting the shelf online
Even though the Mexican retail sector is booming, it faces the same challenges as retail industry sectors in most countries. Over the course of the last few years the big retail chains with physical stores have lost significant ground to the growth of internet sales. A contributing factor to this is the entry of Amazon. The American giant started its Mexican operations in 2015 selling e-books and e-reader devices but soon expanded to offer a full-scale range of products. The number of Internet users in Mexico is growing rapidly and for Swedish retail companies it is most important to use this tool in order to succeed in the Mexican market over the long haul. A good example of embracing the world of internet retailing is the company Cornershop, founded in 2015 and co-owned by the Swede Oskar Hjertonsson. With said company, customers can do their grocery shopping online through their internet browser or smartphone app and choose between products from a variety of supermarkets and specialized stores. After placing the order, the products are delivered to your home or office in a maximum of 90 minutes with a delivery cost of around 3 USD.
The fashion industry is known to be very unpredictable, but Mexico has with its fast and flexible production schemes been able to guarantee on-time delivery and quality which, together with great creativity, has helped the country to meet the needs of the industry to a very large extent. The Mexican retail apparel industry has experienced significant growth during recent years and by the end of 2016 it was estimated that the industry had reached a total value of 6,198.5 MUSD, which is 15.6 % more than in 2011. The positive development is largely the product of lowered import taxes stemming from Mexico´s impressive number of free trade agreements. The aforementioned has allowed foreign companies to enter the Mexican market with a good sustainable growth creating a high level of competition. The tough market climate has forced the players to run intensive marketing campaigns and to create strong brand consciousness in order to keep their market share. In addition to what has been said, for a fashion company to be successful in Mexico it is critical to offer credit facilities to low income consumers and to secure desirable real estate. Despite the strong market presence of department stores such as Sears, Liverpool and El Palacio de Hierro and competition from brands like Zara, H&M has achieved great success in the Mexican market. During its 4 and half years in the country, the Swedish company has opened 25 stores nationwide and according to Bea de la Borbolla, PR and Communication Manager, “Mexico is a very strong market for H&M. The results that we have had these years have been impressive. Customers have received the brand in a very positive way”. Even if H&M as a brand with more economic products has done exceedingly well on the Mexican market, there is a big potential for premium brands as Mexicans through fashion want to signal social success coupled with the fact that Mexico City has more dollar millionaires than Sao Paulo, Shanghai or Moscow.
Mexico as an international retail hub
For those companies who do not see a potential for sales within the Mexican market, the country can be interesting for another reason. Since 1965 it is possible for certain factories called “maquiladoras” to import material and equipment without paying duties and tariffs for assembly, processing, or manufacturing, and then export the final product, sometimes back to the country of origin.This creates special opportunities, especially given Mexico´s extremely low labour costs and that several reports describe Mexico as the most cost-competitive nation in the world for production, eclipsing that of China and other Asian manufacturing hubs. The maquiladora´s favourable manufacturing conditions have drawn attention from Sweden and a group of companies based in the province of Skåne recently signed a collaboration agreement with the Maquiladora Association of the Mexican city Matamoros.
As illustrated in the chart above, the food and grocery industry is by far Mexico´s biggest retail group accounting for 69.7% of the country´s total retail sales and 8.4% of the Americas´ retail food industry value. The industry experienced a dip in 2009/2010 but bounced back shortly thereafter and has kept growing ever since. By the end of 2018, the Mexican food and grocery industry is forecasted to reach a total value of 180 BUSD, with a CAGR of 5% since 2013. The industry is expected to deliver steady growth in the near future thanks to a growing population which is one of the world´s youngest – 55% are 24 years old or younger. “Supermarkets” (300-2 500 square metres) and “hypermarkets” (2 500 square metres and above) control an important part of the Mexican grocery industry with big players such as Walmart and Chedraui dominating the market. The aforementioned channels nearly always have more than 40,000 SKUs (stock-keeping units) which calls for fierce competition when battling for the customer’s attention. In-store visibility is the key factor when it comes to being chosen by the shopper.
A market that is getting healthier
Obesity is a huge problem in the Mexican society and in 2014 Mexico was the most obese nation in the world according to the UN, surpassing the US with 32.8% of the adult population being overweight. Contributing factors include the excessive consumption of sugary drinks and unhealthy fast food. The situation has led the government to promote healthier eating and lifestyle through different state-sponsored programs. The efforts are slowly showing results and Mexicans are now starting to opt for healthier food and beverages. The market for organic products is currently on an upswing, especially in the bigger cities like Mexico City, Monterrey and Guadalajara. It is anticipated that the organic food sales market will have an average annual growth of 15.4% per year until 2017, which is 10 percentage points higher than in the US and makes Mexico one of the most interesting and promising markets in the America´s region. Organic food production has been regulated by the Mexican government since 2006 but it was not until 2013 that an official logo was issued for labeling and commercializing certified organic products, and this can be interpreted as the segment being expected to continue to develop and grow. Some processed organic products that have been successful on the Mexican market are beverages, oils, cereals, sauces, dairy products and sweet products, and they are often sold to premium mass retail outlets, gourmet stores and high-end restaurants. Even if these cost a bit more than conventional products, the middle and upper class are willing to pay more for healthier food options and products originating from European countries are often associated with higher quality. Fortified and diet foods and beverages is another category of health products that is taking market shares from conventional processed food. These products offer value-added ingredients like protein, calcium, vitamins, minerals and more sophisticated functional formulas such as probiotics, folic acid and omega 3, at the same time as often being reduced in sugars and calories. To sum up, there are significant sales opportunities for Swedish companies within the market for health products, perhaps especially for beverages given the fact that Mexico is the number one consumer in the world of bottled soft drinks.
Mexico´s low labour costs, together with its extensive network of free trade agreements, make the country a highly suitable location for manufacturing of all kinds of products, both for the massive domestic market and for onward distribution to the rest of the Americas. Companies opting for a softer landing in the Mexican market should consider teaming up with a local distributor that can provide valuable insights about the specific market and share customer networks. Worth mentioning and something to bear in mind is that the distribution fee can vary quite a lot and consulting Business Sweden can therefore, be a good idea when entering into a partnership.
4 retos que enfrenta este año el sector del retail, Merca 2.0
Abre Matamoros sus puertas a inversionistas europeos, Posta
Counterview: Mexico’s economy post-US election and the tale of Unintended Consequences, Christopher Rodwell
Explaining Mexico´s Consumer Paradox, The Huffington Post
Las Maquiladoras en México como Catalizador de la Globalización, José Antonio Contreras Camarena
Largest Mexico Retailers and Department Stores, The Balance
Mexico: Food Trends and Opportunities, Switzerland Global Enterprise
Mexico Labour Costs, Trading Economics
Retail Sector: Global and Mexican highlights of the supermarket & hypermarket industry, PwC
The Wealth Report, Knight Frank
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