Mexico: Consolidate or die

Wal-Mart’s constructing a store in Teotihuacan, one of Mexico’s main archaeological sites, demonstrates the massive impact of the US retailer on the Mexican market. Close to the ancient pyramids, near the site called by the Aztecs ‘The place where men became Gods’, a 71,902 squarefoot store with a 236-space car park is being built. A controversial addition to this historicallandscape.
Elsevier Food International, Vol. 7 Number 4, November 2004
Pascal Kuipers

Last September, the New York Times quoted a Mexican poet who compared building a shopping centre in sight of the pyramids to ‘driving the stake of globalisation into the heart of Mexican antiquity’. Over the ages, ancient times have evolved into modern times and Mexico’s ailing economy depends on foreign investment, especially from US companies. Wal-Mart Mexico employs over 100,000 people and is the country’s largest private employer. Who could resist such an important economic factor?
Not in the least the local officials in San Juan de Teotihuacan. Since joining NAFTA (North American Free Trade Agreement) and OECD (Organisation for Economic Cooperation and Development) in 1994, Mexico has embarked on a policy of integration in global markets, states KPMG in a recent research ‘Internationalisation of Food Retailing’. Ninety per cent of its trade Mexico does with its NAFTA partners the US and Canada. Sixty-five per cent of foreign investment comes from North America. Eighty-eight per cent of Mexico’s export partners are US-based companies and for Mexico’s imports this percentage is 62 per cent, estimates the CIA World Factbook for 2003.
“In Mexico’s dreary economy, foreign investment, especially American investment, is about the only bright light, and many Mexicans know it,” reads a December 2003 article in the New York Times entitled ‘Wal-Mart Invades and Mexico Gladly Surrenders’. “Cries of economical and cultural imperialism, rampant ten years ago, when the North American Free Trade Agreement took hold, are more muted now,” the New York Times continued.

Economic faith
After a severe recession in 1995, the Mexican economy grew by an annual average of 5.4 per cent between 1996 and 2000, reports KPMG, and per capita income doubled. Annual income, however, is very unequally divided (see Graph 3). Inequality can also be geographically outlined, with the highest standards of living in the modern northern regions of the country and poverty dominating the country’s south.
The Mexican economy did not manage to uphold the economic upswing that started in the second half of the 1990s. Foreign investments peaked until 2001, exceeding the €25 billion level but in 2002 and 2003 foreign investment plummeted to approximately €15  billion and some €6 billion respectively. KPMG explains this by pointing at other, more favourable, destinations for foreign investments in regions of Asia and eastern Europe.
For 2004 and 2005, Mexico’s economy is expected to grow by some three per cent per year but it is questionable if this will lead to a massive reaffirmation of foreign investors’ faith in the country. Important reforms will be postponed due to political considerations: with the elections in 2006 casting its shadows ahead, politicians are unwilling to radically change the energy sector or the tax system. According to KPMG, this will, however, not lead to a downgrading of Mexico by rating agencies like Standard & Poor’s or Moody’s as the weak position of the Mexican currency Peso against the euro and the US dollar did not harm Mexico’s economy. The rating agencies are also encouraged by the government’s intention to stick to its fiscal and monetary policy aimed at stabilisation and reduction of inflation.

Wal-Mart’s dominance
Wal-Mart is a major example of the involvement of a USbased company in Mexico. Since its market entry in 1991, it has clearly put its stamp on the Mexican market. With its business concept of low cost, low prices and high productivity, the US retailer quickly gained the market share needed to dictate the Mexican market. Currently, Wal-Mart Mexico is by far the market leader with a 14 per cent share of Mexico’s US$80 billion food retail market. Runner-up Soriana is more than three times smaller with a share of 4.4 per cent. Combined, the number 2, 3 and 4 retailers in Mexico - respectively Soriana, Controladora Comercial Mexicana (CCM), and Gigante - are still smaller with a combined market share of 12.3 per cent. Sales of Wal-Mart Mexico account for some two per cent of Mexico’s GDP and price cuts at Wal-Mart are said to have a direct impact on Mexico’s rate of inflation. Because of its low price focus and rapidly increasing scale of operations, Wal-Mart Mexico turned the Mexican retail industry into a highly competitive business, to the detriment of foreign retailers such as Auchan and Carrefour. Auchan entered the Mexican market in 1998, tying to establish a business via organic growth in this, then, promising and growing market. In 2002, however, the French decided to retreat from Mexico, selling their five hypermarkets to CCM.
Carrefour entered the Mexican market in 1994 in a 50/50 joint venture with Gigante, which sold its stake to Carrefour in 1998. Recently Carrefour has been rumoured to be leaving the  Mexican market as “returns for Mexican operations are believed to have substantially lagged capital costs since their inception due to the competitive marketplace and limited scale,” as M+M PlanetRetail quoted an analyst from Merrill Lynch. Last September, however, Carrefour’s local manager Jean Noël Bironeau denied all this in the Mexican press. According to M+M PlanetRetail, Bironeau unveiled plans to add five or six more stores next year, to Carrefour’s 28-store network.

Fierce competition
Local retailers Soriana, CCM and Gigante are also struggling in competing with Wal-Mart Mexico. Wal-Mart has been increasing its sales by almost 11 per cent annually between 1999 and 2003 but Graph 2 shows that these retailers developed at a much slower rate (Soriana and Gigante) or even declined (CCM).  Soriana, characterised by KPMG as “one of the best managed and technologically most advanced hypermarket operators in Central America” plans to invest some US$564 million between 2003 and 2005, adding another 75 stores to the 118-store network it was operating in early 2003. Soriana is leading Mexico’s hypermarket industry but has chosen to adopt a multi-format strategy, says M+M PlanetRetail. It is going to add warehouse clubs (City Club) and superstores (Mercado Soriana)to its hypermarkets. Especially in the superstore format, Soriana will face fierce competition not only from Wal-Mart Mexico’s Bodega Aurrerá format but also from Gigante and CCM. M+M PlanetRetail points out Soriana’s weak spot: declining like-for-like sales. “Soriana should tackle this, if it wants to ensure a healthy growth based on improving sales performance and not just new store openings” CCM’s operationsare mainly located in the region of Mexico City, where it competes headto-head with Wal-Mart Mexico. CCM operates hypermarkets and superstores but it also has a 50 per cent stake in a joint venture with Costco USA. Costco has been successful in recent yearsbut the main engine of growth is CCM’s hypermarket banner Mega. The year 2003 was a successful one for CCM in which it reported a 26 per cent increase in net profit. Gigante was under pressure in 2003. According to KPMG the growth of Soriana and CCM happened to the detriment of Gigante. This retailer spread its business nationwide but is in none of the regions the dominant retailer.
 
Growing businesses in Mexico
Graph 2 shows that smaller players have shown the quickest growth rates in recent years. Since entering the Mexican market in 1995, US retailer HE Butt built a 20-store chain of hypermarkets in the country’s more developed northern region. Between 1999 and 2003 its sales increased by a staggering 35 per cent per year. HEB’s domestic home base is the neighbouring US state of Texas and its stores stock a mixture of US and Mexican products.
“The company appears to be establishing a rewarding two-way relationship between its operations in the two countries,” says M+M PlanetRetail. “It serves a large number of Mexicans and other Latinos in its stores in Texas and has used its presence in Mexico to source popular product ranges for sale in its domestic units.” HEB is building a new distribution centre in Monterrey, which is said to have a capacity of supporting 40 to 50 stores. HEB therefore expects further growth. Costco - a 50/50 joint venture between CCM and Costco USA -increased its sales by some 31 per cent annually between 1999 and 2003, especially through like-for-like sales. During this period, Costco increased its store numbers by four to 21 but managed to dramatically improve sales per square metre from US$1,985 in 1999 to US$4,408 in 2003.
A third rapid grower to mention is OXXO, thelargest convenience store chain in Mexico,  operated by FEMSA Comercio. This is a subsidiary of FEMSA, Mexico’s largest producer of beers and soft drinks. OXXO - originally intended to improve sales of beer - has some 2,700 SKUs in stock and is the key format for FEMSA Comercio. According to M+M PlanetRetail, FEMSA Comercio opened some 600 new OXXO stores in 2003. Last June it acquired a 73 store chain that will also be integrated in OXXO.
Other local retailers within the top ten have average growth rates, such as privately owned Chedraui, which mainly operates hypermarkets and to a limited extent c-stores (four stores under the Supersito banner), bakeries (La Hogaza) and C&C stores (Suma y Multiplica).
Chedraui also exploits shopping centres via its property division. Casa Ley - for 49 per cent  owned by US retailer Safeway Inc. - operates food stores and general merchandise superstores in northern and western Mexico.

Collaboration and consolidation
Mexico is a fragmented market with a market leader who holds a 14 per cent share of the  market, as much as the following four retailers that complement the top five. The top ten retailers account for 34 per cent of the market and a company with a market share of 0.8 per cent already ranks within this retail top ten (see Graph 1). Mexico’s National Association of Retail and Department Stores Antad registers some 42 corporations as operators of supermarkets covering 554 banners throughout Mexico. Squeezed by a heavyweight market leader, the competitive retail food sector is facing future consolidation. Given the fragmentation of the market, many scenarios are possible. KPMG expects a multitude of mergers and sales of assets because a majority of retailers within the top ten is privately owned. Any attempt to acquire a business would therefore be perceived by shareholders as an attempted hostile takeover, its survey reads. Compared to large foreign players represented in the Mexican market - Wal-Mart, Costco, Carrefour - local retailers’ market capitalisation is trifling, says KPMG, which obviously thinks foreign retailers will take the lead in any meaningful consolidation scenario.
Local retailers can only try to finance a larger acquisition via their free cash flow. Still, Soriana, CCM and Gigante are actively looking towards collaboration as their mutual competition is outshined by a common threat: the dominance of Wal-Mart. Last July, Mexico’s Federal Competition Commission finally approved the purchasing alliance ‘Sinergia de Autoservicios’, set up by Soriana, CCM and Gigante. Sinergia seeks to leverage the three retailers’ buying clout but it also looks at operational synergies, mainly improved logistics. This will lower operational costs not only of these retailers but also of suppliers who will be keen on added value in return when Sinergia tightens the buying conditions. Sinergia accounts for 12.3 per cent of the market and puts its three members in a better competitive position versus Wal-Mart Mexico (14 per cent market share). According to M+M PlanetRetail this is surely true for local food purchasing but not for non food, where Wal-Mart’s international buying clout proves unbeatable. Wal-Mart’s sophisticated technology combined with its aggressive expansion and short prices indicates, says M+M PlanetRetail, “[...] that this is not going to be a short war, and further consolidation will have to take place in Mexico in order to meet Wal-Mart’s challenge.”
Consolidate or die. A message that does not seem to have fallen on deaf ears with the families Martín Bringas, Losada and Gonzáles, who control Soriana, CCM and Gigante, respectively. Still, these three retailers stress that they will maintain their independence, so it is mere speculation m if Sinergia is the first step towards integration.