Properties & Leasing

6 reasons why U.S. retailers should enter Mexico

Posted by: Alejandro Luna Alejandro Luna
on September 6, 2012

Many of the U.S.’s biggest retailers have expanded into Mexico over the past decade, and many of them have been in Mexico longer. Home Depot, Lowes, Bed Bath & Beyond, Best Buy, Sally Beauty Supply, GNC, and Saks Fifth Avenue make up a short list of these merchants. GAP will open its first store in Mexico in September 2012, but has been in Mexico for some years now, inside the corners of Liverpool, a well-known Mexican department store.

They join businesses such as Walmart, which entered Mexico in 1991 and has since become one of the country’s largest retailers with 2,162 retail units. In particular, Walmart has catalyzed Mexico’s grocery category, creating strong competition among the top three local grocers — Soriana Group, Comercial Mexicana, and Chedraui.

In addition, several major American restaurants have joined the market with their expansions south of the border. McDonalds, Burger King, Chili’s, Applebees, California Pizza Kitchen, Olive Garden, P.F. Chang’s, and Starbucks all now have Mexican operations, amongst many others.

These businesses are forming the foundation of a new era in Mexican retail, and creating a modern and dynamic business sector. But while many retailers are opening locations in Mexico, there’s still ample room for other retailers to claim market share, grow their customer base, and drive new revenue in the country.

We’re seeing the crucial economic numbers moving in the right direction for the Mexican market, and believe it is a strong area for retail growth. Specifically, here are six reasons why U.S. retailers should enter Mexico.

1. The Mexican economy is back on track. Mexico’s economy has bounced back, with GDP posting positive growth of 5.4 percent in 2010 and 3.8 percent in 2011. In addition, unemployment in Mexico continues to decrease since 2009, now at 5.2 percent. This has improved consumer confidence, evidenced by Mexico’s retail sales growth this year. Mexico’s retail sales were up 5.2 percent in May from the previous year. Mexican retail association Antad also reported that sales increased 14.8 percent on the year in June at its member locations, which comprise 30,000 retail stores.

2. Mexico’s middle class is emerging. While many Americans see Mexico as a downtrodden country, a dramatic demographic shift has taken hold over the past decade. Mexico’s middle class is emerging. Lower income families are finding better jobs and earning higher pay. As a result, more consumers are shopping at retailers and department stores such as Liverpool, which has become one of Mexico’s largest mid-to-high-end department stores with 85 locations nationwide. As the middle class continues to grow, more consumers will desire a greater variety of products at a better quality.

3. Mexico is under-retailed. The success of Liverpool and the many other retailers listed earlier is paving the way for a broader retail market in the country. These retailers are building a strong market foundation, yet competition remains low, giving early comers room to carve their niche in Mexico’s marketplace. For instance, there are no retail concepts like Kohl’s or Barnes & Noble in Mexico, creating an opportunity for these retailers to tap the country’s growing middle class market. The lack of a number of junior anchors and category killers is significant.

4. Online retail competition in Mexico is low. Mexico’s online retail market remains very small, which is continuing to create a strong need for brick-and-mortar stores in the country. Mexico’s online retail sales are about $1.4 billion a year, according to Forrester’s 2011 Latin American Online Retail Forecast (its most recent report available). This is partially due to the country’s lack of Internet access. Forrester found about only 10 percent of the population has broadband access. In addition, many Mexicans fear sharing their personal information online, creating a major obstacle for online retailers, but a breeding ground for brick-and-mortar retailers.

5. There are no trade tariffs between Mexico and the U.S. The North American Free Trade Agreement (NAFTA) immediately cut many trade tariffs between the U.S., Mexico, and Canada when it was implemented in 1994. The act eliminated all remaining trade tariffs between these countries as scheduled in 2008, creating the world’s largest free trade area (in terms of GDP). This has dramatically opened trading between the U.S. and Mexico over the past few years, strengthened the countries’ economic ties, and removed a major barrier for U.S. retailers entering the Mexico market.

6. Mexico’s apparel market is bouncing back. Mexico, once the U.S.’s largest clothing supplier, slipped to the #6 slot in 2010 due to China’s market domination. However, Mexico is now reclaiming its U.S. market share, rising to become the U.S.’s fifth largest clothing supplier in 2011. In addition, Mexico’s clothing export market grew 7.4 percent last year, outpacing China’s 5.1 percent growth rate. We see two major factors driving the Mexican clothing market revival. One, manufacturers are increasingly focused on producing higher quality products, and two, manufacturers are developing a more varied product portfolio. This environment can help brands such as Target meet demand for high-quality and more varied products. What’s more, brands can capitalize on Mexico’s lower production costs and export their products to the U.S. without tariff expenses.

Taken together, all these factors are fueling a more vibrant retail sector in Mexico, and Kimco has been working to help retailers best position themselves to take advantage of the market. We have built a strong business in Mexico since our entry in 2002, growing our Mexican portfolio to 55 properties and 11.8 million square feet.

Nearly all of Kimco’s Mexican properties are anchored by grocery stores and include everyday essentials retailers. These are the categories that have historically hinged our success and that are growing rapidly in Mexico, creating a strong environment for other retailers to ensure their success.

We’re continuing to foster strong relationships with national and international grocers, cinemas, furniture stores, banks, restaurants, and other businesses to drive robust tenant mixes at our properties. We see clear opportunity for many more retailers to grow their operations in Mexico, and inject new capital into their businesses.

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