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FALL 2015

GLOBAL REPORTS FROM , CUBA, ITALY AND PAGES 17,18,23,32,42 MILLENNIALS: TALKING LUXURY AND THE WORKPLACE OF THE FUTURE PAGES 8, 40 COSTCOHOLICS 75 MILLION ADDICTS AND COUNTING PAGE 3

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EXPANDING GLOBALLY?

FALL 2015

@thestorewpp www.wpp.com INTERNATIONAL

By Gwen Morrison & David Marcotte Expanding Globally? THEN CONSIDER MEXICO

This is a challenging time for retailers substantial migration across borders. to invest in global expansion. About ten And clearly there is the influence of years ago the industry experienced a each culture on the other, with Latino Q&A with Miguel Flores, Gold Rush of sorts, heeding calls to “Go traditions becoming well known in the West” (or “Head East,” depending on U.S., and U.S. holidays, brands and American Eagle Outfitters your perspective) to China and India. entertainment quite familiar within Some launched seriously misguided Mexico. All of this makes setting up shop Mexico, who gives further formats, like those of and in Mexico far easier for a U.S. retailer insight into how a Carrefour, that didn’t properly serve than moving to most other countries. local consumer preferences or failed U.S.-centric brand can to come to terms with political realities. Why the Time May Be succeed in Mexico. (Since then, many adjustments have been made. Retailers who had the fortitude to Right for Mexico stick it out stayed and eventually grew Many positive developments and indica- (XFO: How did you decide to launch to understand and manage to the local tors make Mexico worth considering as in Mexico? shoppers’ environment and needs. an expansion site. First and foremost, More recently, the call was to move there is a growing middle class. Miguel: Many retailers don’t pick into Brazil, Russia and South Africa, Mexico as they consider expansion Until recently, there were two economic the balance of the so-called “BRICS” early on. They go to Asia or they tiers in the country, the very wealthy and countries. No longer labeled “emerging go to Europe. At American Eagle the very poor, providing little promise for markets,” BRICS offered opportunities Outfitters, we fielded a global study U.S.-style , which serves busy, two- for fast growth from both new money that told us Mexico was an obvious income households, The poor wouldn’t and the promise of government choice. We also knew that have been able to afford to shop there investments in infrastructure. love our brand and were already and the rich, with their big houses and transacting heavily in tourist desti- However, recent political and economic staffs of domestic help, didn’t need it. nations and border stores. Culturally developments, including unstable However, the rapid expansion of middle- it's embedded in the lives of Mexi- currency and concerns about corruption, and high-quality manufacturing in the cans to go to the U.S. to shop for bet- have caused retailers to rethink where last decade has created a growing and ter value, better service, and better and when to expand across borders. educated middle class comprising almost quality. So they are familiar with U.S. Many have postponed moves into half the country. Mexico now looks quite retail brands and we knew that AEO what otherwise might be promising different than it did in its bipolar past. as a brand fit right in with Mexico’s expansion markets. Much of Africa fits Mexican shoppers want to shop, and teen and young adult aspirations. this description of potential shaded by they want good retail experiences. “Real Clothes for Real People” really high risk. With the possible exception of strikes a chord with them. India, so far none of these regions look Suburban Sprawl very promising in the next few years. (XFO: What hurdles did you see? Enter Mexico, where we’ve recently This larger middle class is driving an taken a deep look into what we believe overall shift of the population to the Miguel: The challenge for us was to overcome the unfortunate percep- are tremendous opportunities for U.S. suburbs, along with a move to dual businesses. There is a longstanding incomes in most cases. Not only do they though complex set of relationships want to shop in nicer stores, they want to do so after work and on weekends, which between the two countries, intensified by Continued on page 25 the mechanics of free trade (NAFTA) and is at odds with the traditional informal Continued on page 24 / 23 INTERNATIONAL

Continued from page 23 Mexican shoppers drive past them to shop at Macy’s, Nordstrom Rack and the major lifestyle malls. Challenges Remain

This is not to say that Mexico is an automatic route to success. While we’re not exactly saying “Mexico is the new China," there are several challenges to doing business in Mexico. Corruption in Mexico has come more into the glare of the public eye than in the past. However, though still a reality, it is not necessarily on the increase. Key services, such as water and the building of infrastructure, continue to be distorted by ‘unseen hands’—but the government has become far more active (and success- ful) in reducing the impact of bribes and racketeering in some other areas. The police and public security organizations continue to improve, the oil industry has been made partially public, and even retailers. Sound familiar? This is exactly Since the burgeoning middle class does the Teachers Union has been challenged. where the U.S. was four decades ago, not have household help, there are more Social Media has played a large part at the start of its big phase of retail home furnishings and kitchen stores. in driving public opinion to force sales growth. The department stores and malls are these changes and is providing a creating destination food courts for Though malls are on a general decline backdrop of “social shaming” that has these time-pressed and experience in the U.S. as they age and lose out to had some effect. oriented shoppers. online retailers, in Mexico about 50 malls Infrastructure is improving more quickly, per year, averaging a million square feet The Wealthy Want to starting with the modernization of ports each, are being added. Since the new on the Pacific and the Gulf, along with suburbs lack the infrastructure for large Shop, Too the land ports on the U.S.-Mexico border. shopping areas, and the older cities have Rail freight and intermodal containers real physical constraints to being able Not to be outdone, the very wealthy are have improved greatly in the last ten to support these requirements, the new flocking to their own new malls in cities tears, resulting in a huge increase in malls are being built on commuter routes like Cancun, Xalapa, Polanco (within air freight and commercial travel, between suburbs and cities, to give ), Santa Fe and . particularly at the smaller airports. access to both. Carlos Slim, the most successful And although the highway system has businessman in Mexico, is committed to The Palacio de Hierro and Liverpool enjoyed the biggest improvement, it creating more of these mega malls and department store chains have been has not kept pace with the increase integrated shopping experiences such as remodeling and expanding their existing in passenger cars and trucking. Home those on the north side of Polanco, where malls, and plan on adding five new delivery remains challenged, with the he has rebuilt the entire area around the ones each year between them. The last 1000 meters from the transportation old rail yards into multiple malls, with supermarket chains Chedraui and network to the home still a problem. entertainment centers that include a Comercial Mexicana have similar plans. world-class art museum and aquarium. Violence from the drug cartels is very Crate & Barrel, and real, but has lessened greatly in most Gap are now in Carlos Slim’s Plaza areas also. It can flare up quickly, Carso development. however, so it needs to be monitored Mexican shoppers are accordingly. Organized crime is still a Viva American Brands concern for business and for individuals tuned in to American in most parts of the country, and retailers brands. Hundreds of Mexican shoppers are tuned in to have become remarkably quick to shift shopper groups each month American brands. Hundreds of shopper to a far more nuanced and effective groups each month take organized bus security network to offset this challenge. take organized bus trips trips from Mexico to Southern Arizona eCommerce Still In Relative Infancy to stock up on merchandise that is Although the middle class shopper in from Mexico to Southern unavailable at home or that is perceived Mexico is highly engaged with online ac- Arizona to stock up on as better priced stateside. But overall tivities, including social media tools such these trips are less about pricing and as Facebook and Twitter, Mexico’s ecom- merchandise that is more about experience. The malls, shop- merce sector has barely gotten started. unavailable at home or ping centers and retailers that receive the The Latin American pureplay online bulk of these visitors provide a superior retailers of Linio.com and MercadoLibra. that is perceived as better shopping environment. It is telling that com do reasonably well, but they also ex- the older shopping plazas on the south perience limitations in fulfillment due to priced stateside. side of Tucson and in the border town of the evolving infrastructure and perceived Nogales have lost much of the Mexican dangers of home delivery. trade on which they were built, as

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Amazon has announced it will be launching Q&A with Miguel Flores a Mexico site, and is aligning with the large distributor and retailer FEMSA—which Continued from page 23 not only owns 13,000 OXXO convenience stores and close to the 1,000 drug stores, but is also the largest distributor to the small retail store in the market. Being able tion that you might not get the same (XFO: Can you to deliver to every neighborhood of any quality of service in Mexico as in the describe your size in the country on a daily basis will be U.S., and that the pricing is unfavor- launch? Did you have crucial to establishing a stable eCommerce able. Shoppers were skeptical that a spokesperson from Mexico? business in Mexico, as will the ability to our pricing would be fair. We Miguel: The fact that we don’t use provide credit to Mexican consumers. So the maintain the same price with celebrities worked well for our opportunities in Mexico are primarily in the currency exchange from one launch. We opened 18 stores in 12 brick-and-mortar sector, at least for now. country to the other. cities throughout Mexico. Again, Any U.S. retail brand considering expansion The second issue was that many “Real Clothes for Real People” allows into Mexico must first ask itself a few key brands that have a certain positioning us to showcase great lifestyle and fun questions: How does the brand translate in their home market come to Mexico people in everyday life. The trick into the Mexican culture? How does the pretending to be something they are was to create buzz in social media retail and brand experience offered serve not. For consumers who know the before we were ready to launch unmet shopper needs? Are the broader brand, they always end up saying an ecommerce site. infrastructure issues something the retailer "You know, it's not the way I expected is willing to deal with? it to be here." So we needed to deliver We did this by taking a pop-up experience to universities and malls The growth in Mexico’s middle class, the same standard of experience around the country. We invited people increasing demands on consumers’ time, within the store and online. to try on the jeans and share their and expanding payment options offer a : How do you evaluate if love of the great fit with their friends. sweet spot of opportunity for many (XFO particular campaigns originated in the We gave them coupons to redeem at retailers today, and should not be ignored. U.S. will play well in Mexico? a physical store. Don’t let the challenges of Mexico scare you. The ultimate reward might be more than Miguel: It’s always a fine line. We We started with 817,000 people that worth the risk. are a U.S.-based brand, and we want were already following us on a cor- to have the same campaigns, but porate Facebook page before opening occasionally they don’t translate. For in Mexico. In only two years, we've example, for holiday last year, the been able to grow that base to over 2 U.S. windows featured down jackets million people. And then we opened with the line "Get Down." That would our Twitter organically and already GWEN MORRISON not play well, so we substituted a very we are at almost 100K people. CEO of WPP’s typical Mexican phrase that means The Store "We're Warming Up." So we keep the Gwen: Any advice you would like brand’s DNA and the essence of the to share? promotional message while making it relevant for the local consumer. Miguel: First, we invested the time required to really understand the brand in the context of the Mexican Gwen Morrison’s career has been devoted to (XFO: Tell us more about how the building brands in the retail space. She is CEO of AEO brand fits within the competitive market and our core shopper. We WPP’s The Store, responsible for extending WPP’s set in Mexico. did not rush, in and this was key. leadership in retail innovation and supporting Second, we capitalized on our global resources for WPP group companies across Miguel: The denim market is a 1.7 brand’s strengths relative to the the Americas and Australasia. She has contributed to Harvard Business Review, Brand Week, and billion (USD) market in Mexico. lifestyle our consumer in Mexico Journal of Brand Strategy. Based in Chicago, she We thought that was very attractive. aspires to. Third, we showed respect is a guest lecturer at Northwestern University, We knew the market was being for the community. We started a University of Chicago, and University of Arizona’s dominated by traditional players, campaign to fund public spaces Terry J. Lundgren Center for Retailing.. brands launched over 20 years ago, where our consumers go to meet but that a lot of new brands were and have fun. also coming, like GAP, Aeropostale, Hollister and Abercrombie. But So we heard them, we asked DAVID MARCOTTE consumers told us, “I don't like to them, we looked at them, and we Senior Vice be told what to wear, I have my own followed them. We decided on how to President for style but I still need some inspira- approach our customers. We engaged Retail Insights, tion.” They also said they liked our them, we got them to go to the stores, Kantar Retail everyday fashion and unique styl- and now the big challenge is to keep ing. So we loved that positioning. It it going, to continually exceed our gave us an amazing opportunity, and metrics for traffic and conversion. David Marcotte is Kantar Retail’s Senior Vice we looked at this and we said this is President for Retail Insights in the Americas. He exactly where we want to be. We saw /PUF"UUIFUJNFPGBSUJDMFQVCMJTIJOH has nearly 20 years working in the Latin American region, and for 20 years was a retailer in the United that we could capitalize on our brand .JHVFM'MPSFTIBTNPWFEPOUPPUIFS States and Canada, including at A&P, SuperValu, strengths and connect with Mexican FOEFBWPSTBOEJTOPMPOHFS$PVOUSZ-FBEFS and Big Y Foods. He is seen as an expert on all consumers’ personal sense of style. GPS"&0 the dynamics of Latin American retail infrastructure and government, along with consumer studies.

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