Mexican modernization

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Mexican modernization

04/06/2015

By Brenda G. Russell

Walmart de México last May got antitrust approval to sell its 361 Vips restaurants.  The $626 million sale helps fund a Latin American expansion that will expand its Mexican footprint by 5 percent.

Most new investment will go not into new warehouse clubs but in small groceries and convenience stores. They’ll compete with traditional city market stalls and family bodegas. 

Along with centrales de abasto wholesale markets, the informal markets account for half of all grocery sales. But modern retailers are gaining market share.

Walmart is bigger than the next three modern-style retailers combined. Its success has changed what’s on Mexico’s grocery shelves and brought modern retail on a par with traditional city markets and street vendors. 

Regional chains have learned from Walmart’s merchandising, formed alliances and mergers to compete nationally, and poured cash into upgraded stores and upscale concepts.

The A.T. Kearney consultancy says regional chains grew aggressively in 2012, making prime real estate harder to find and encouraging the small-store growth trend.

The retail trade group ANTAD says 2012 sales growth was 10.8 pecent to $83.3 billion. Supermarket same-store growth is 3.5 percent. IGD values the Mexican retail grocery market to be worth $121.38 billion. 

“On a recent trip to Mexico, we also noted that retailers are focused on winning on price, differentiation through ranging strategies, excelling in fresh to capture trade from informal markets, pushing the bar with premium retail formats, and credit programs to appeal to low-income shoppers,” says IGD analyst Catherine Ellwood.

The talking points will seem familiar to North American grocers, because the U.S. and Mexican economies always have been closely related. 

Direct investment from the U.S. extends from automobile and other manufacturing plants to agriculture and retail joint ventures like Walmart de México, now three-fifths owned by Wal-Mart Stores.

“After the opening of the market to foreign retailers in 1991, the industry changed rapidly, with new formats proliferating and providing Mexicans with new ways to shop,” says a March 2014 McKinsey & Co. study.

Texas-based H-E-B hypermarkets also operate in Mexico, as well as 7-Eleven and Circle K. Anheuser-Busch InBev’s $20 billion purchase of the Modelo brewery in 2013 includeed the 856-unit Extra convenience store chain.

Foreign direct investment has Mexico’s recovery from the 2007 global recession, according to a Euromonitor International report. Short distances to the U.S. have become a more important factor with higher oil prices. Mexican costs for manufacturing labor are only 15 percent higher than China.

The North American Free Trade Agreement spurred direct U.S. investments in food and beverages as well as manufacturing. The food component grew to $3.6 billion in 2011.

NAFTA makes Mexico a fast-growing U.S. export market—$18.9 billion in 2012. The U.S. buys three-fourths of Mexican agricultural exports and produces about three quarters of its food imports, the U.S. Department of Agriculture says. 

Mexico imports grains, oilseeds and beef; it exports beer, and the vegetables and fruit produced in its more favorable climate.

More than 10 million Mexicans work in the U.S., and send home about one-fourth of their earnings, according to Euromonitor. Mexican migration slowed or perhaps reversed in 2012

"The retailers in Mexico were a case to mourn in 2013," said Intercam analyst Alejandra Marcos in a report. “Remittances fell, government spending was lower, consumption never took off. In short, it was the perfect storm.”

World Bank figures indicate an economy outpacing the U.S. For 2012, the Mexican gross domestic product was US$1.178 trillion—3.78 percent growth for the year, a full percentage point higher than the U.S.  

But it’s still a less robust economy.  Its output amounts to $8,545 per person, versus $45,336 in the U.S. Per-capita growth for the two countries were equal at 2.5 percent.

Hypermarkets are the most popular grocery format, typically stocking 60,000- 70,000 stock-keeping units. The format grew 10 percent in sales and 7 percent in store count in 2012, Euromonitor says, to $19.3 billion in 838 stores.

Supermarkets (50,000 or fewer SKUs) reached $11.5 billion, 9 percent higher by sales. Some chains such as Super Precio, 3B and Casa Ley operate primarily as discounters. Non-grocery items account for 17 percent of sales, Euromonitor says.

Convenience stores have had a decade of double-digit growth. Oxxo, with three-quarters of the convenience market, opens record numbers of new stores every year. 

Fabiola McClellan, senior marketing specialist with U.S. Department of Agriculture’s Mexico City trade office, says major retailers are moving deeper into small store concepts to compete with convenience and family owned stores. 

The No. 2 Soriana hypermarkets have diversified to warehouse clubs, Mega Comercial superstores and Bodega Comercial convenience stores.

Soriana is Mexico's second-biggest supermarket chain, according to Euromonitor International, with an 8 percent grocery market share.  Comercial Mexicana is the fourth-biggest, with 200 supermarkets and a 3.4 percent share.

Credit Suisse notes that Soriana is replacing its old refrigeration systems and low-quality perishables. Half of new Soriana stores are its Mercado Express convenience concept. Soriana bought the Gigante chain in 2007 for nationwide reach, and installed SAP retail software to manage multiple channels.

No. 3 grocer Chedraui has 7.3 percent of the market. With new capital from stock investors, it’s opening upscale Chedraui Selecto stores to compete with Walmart, Superama and H-E-B, and converting some supermarkets to discount stores. Chedraui also is expanding into the U.S. Latino market.

Comercial Mexicana sold its stake in Costco Mexico in 2012 for expansion capital. Banamex estimates same-store sales are down 1.6 percent. It also operates 68 restaurants.

“La Comer” reopened three of its Mexico City stores in its upscale City Market concept, and plans to convert more of its Sumesa stores, McClellan says.

All the smaller concepts compete not only with local bodegas and open-air markets but also with Oxxo’s more than 11,700 convenience stores. The chain is a unit of Coca-Cola and Heineken bottler Femsa. 

Oxxo is adding perishables and fresh food to compete with discounters. Invex Analysis data says the chain is second to Walmart in average sales per square meter.

“Some retailers are exploring new routes to growth,” says IGD’s Ellwood. “Femsa Comercio, operator of Oxxo, has acquired stakes in regional drugstore chains Farmacias YZA and Farmacias FM Moderna, and in a quick service restaurant operator called Doña Tota.”

Walmart, Soriana, Femsa, Chedraui, and Comercial now account for about 42 percent of the food and beverage market and two-thirds of the modern grocery channel in Mexico, according to McKinsey. 

Regional grocers are on the move as well. Sinaloa-based Casa Ley, in 12 northern states, is adding Ley Express convenience stores and high-design Super Ley hypermarkets. Its Super Ley Mayoreo wholesale stores do not require membership.

Tijuana-based Calimax, which ranges from Baja California to Sonora, is building new supermarkets in a smaller but more functional concept. The USDA says 30 percent of items in the 100-store chain are of foreign and mostly U.S. origin. 

Calimax also is in buying alliance with regional grocer S-Smart and a joint venture with the California-based Smart & Final warehouses. 

A 2013 Deloitte Touche Tohmatsu study says Mexican retail has attracted substantial foreign investment and quickly could resume its healthy pre-recession growth pace. Retail growth is spreading in smaller metropolitan areas as transportation infrastructure improves.

Major retailers have grown more quickly than overall consumer spending “as the modern sector takes market share from the informal sector,” the Deloitte report says. 

The Mexican population of 115 million is growing at nearly a 2 percent rate, according to Euromonitor, largely in urban areas oriented toward U.S products. 

Women in the workforce demand more consumer-ready products, and are attracted to what they see as a healthier U.S-European diet.

Food and beverage sales through modern retail rose from 50 percent in 1999 to 60 percent in 2007 and 65 percent in 2012, McKinsey says. 

The U.S. exported a record $7.3 billion in consumer-ready foods in 2012, according to Euromonitor, a 9 percent increase. 

Top processed food exports to Mexico included red meats and poultry, sweetener, concentrated milk, fats and oils, red meat offal, oilseed flour, cheese, beans and lentils, flavorings, soup and chocolate candy. 

High growth categories in its five-year forecast include meal replacement, sweet and savory snacks, confectionery, chilled processed food, sauces, dressings and condiments, ready meals and dried processed food. 

The London-based Mintel marketing consultancy sees signs of growing affluence in the growth of Mexico’s snack food and pet food markets. 

Crisps and nuts are in growing demand. Nestle and Mars are encouraging owners to feed their pets packaged food instead of table scraps. 

Food and drink, excluding foodservice, accounts for a quarter of household spending, compared with less than 7 percent in the U.S. Mexican food spending, particularly prepared food, will accelerate. Foodservice will barely grow.

Alcohol and tobacco growth is subdued, according to Mintel, and personal care and beauty products are expected to rise only modestly.

A rise in total expenditures would benefit household products, which would grow an extra 1.4 percent with 1 percent higher spending and 2.8 percent under 2 percent growth model. 

Middle-income stores are offering more premium and gourmet products. Premium and gourmet concepts abound: City Market by Comercial Mexicana, Selecto Chedraui, Super Casa Ley and the San Antonio import H-E-B. 

But the market is still value driven, with dollar-store items popular in the 10-peso front sections of Walmart and Bodega Aurrera stores. La Comer’s long-running Julio Regalado and other promotions abound.

 

 

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