The Retail and Consumer Industry in Mexico May 2016
Convenience matters Serving the new Mexican consumer
In this report
2 Mexico: Stability amidst global volatility
4 More than just tequila: Significance of the retail and consumer sector
8 More pesos in the pocket: The sector takes off
12 Convenience matters
16 In the shadows: The vast informal market
22 Building capability muscles and aligning your operating model
29 The winning concoction: Local knowledge, global expertise
31 Unlocking the enablers for growth
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Foreword
As the world’s developing markets face a Arguably, retail and consumer reflects There are excellent examples of such time of volatility, Mexico stands out as the opportunities emerging from the companies in Mexico. A retailer like one of the key markets weathering the duality of the Mexican economy better FAMSA has managed to properly storm. It is doing so through sustained than any other sector: balance the risk required to serve this evolution and slow but steady growth more informal segment of consumers, in many dimensions. The retail and • Modern format retail stores and through a combination of deep consumer sector is one industry which multinational franchises such as consumer knowledge and alternative has the potential to exceed Mexico’s Walmart and Starbucks are constantly contact channels, while also leveraging average national future growth. This growing and developing, alongside its traditional stores and offerings, not will be driven by a combination of the resilient traditional ‘changarros’ just to gain access to these new economic and socio-demographic and adapted concepts such as OXXO consumers, but also to earn increased trends, the progressive implementation and Farmacias Similares. loyalty from them. of a comprehensive set of critical • International brands such as Coca-Cola reforms which should improve and Frito-Lay coexist and compete The successful retailers and consumer disposable income, and the innovation with incumbent local brands such as goods companies in Mexico will be those of the various players in the sector in Bimbo and Jumex, and numerous which are willing and able to develop tailoring their offerings and business artisanal products that are flexible business models, while models to appeal to Mexican consumers. ubiquitous to Mexican consumers. leveraging local networks of suppliers and partners that can complement them • Consumers seamlessly alternate from Much has been said about ‘the Two in better serving the Mexican consumer. modern to traditional channels, and Mexicos’ – ‘the formal and the informal Having a global brand, the best from formal ones to informal ones, Mexico’ or ‘the developed and technology or the strongest global based on convenience and occasions underdeveloped Mexico’. It is true that processes will not be enough to to fit their evolving lifestyles. Mexico continues to be a country with guarantee success. many stark contrasts. In our opinion In the future, Mexican consumers from these will create a compounding effect both groups will want more convenience Much has been said about the Mexican which will generate significant long- and more choices to suit their lifestyles, opportunity. We believe it is there for term growth opportunities for the retail and they will increasingly expect their retail and consumer players to capture and consumer sector. We believe that retailers and their brands to do more to through a combination of foundational consumers from ‘the Two Mexicos’ will earn their loyalty. To successfully and innovative capabilities, smart continue to mesh together and fuel the capture the opportunities with the new tailoring of products and services to middle class, both from the formal and Mexican consumer, retailers and increase convenience for consumers informal segments. We also expect the manufacturers will need to adopt more joining the middle class, and a sector to evolve rapidly, as millennials innovative business models. These will willingness to adapt and evolve with increasingly join the economy and shape need to be based on a combination of them through this journey. spending and shopping habits. world-class capabilities, such as supply chain efficiencies, with Mexico-specific capabilities, such as providing access to credit for the informal consumer and facilitating the transition into the middle class and the formal economy.
David Wijeratne Carlos Navarro Growth Markets Centre Leader Partner, PwC Mexico
PwC | Convenience matters – Serving the new Mexican consumer | 1 Mexico: Stability amidst global volatility
The belief that the growth markets will However, Mexico has managed to avoid The engine behind lead global growth has been shaken over the most dangerous pitfalls that have the Mexican the past year by events in key markets slowed growth in these other markets such as the impending economic and is still able to boast a positive economy is big and contraction of Brazil and Russia, the economic growth of 2.3% over 2015 already in motion. slowdown in China’s GDP growth and (see Figure 1). While growth is not increasing pessimism in South Africa. stellar, it marks a positive difference Mexico will be One of the exceptions at present is India, amidst the slowing emerging markets. very different in where economic growth is holding up, but much-needed reforms are yet to be 10 years. passed and this could hamper growth here too. Alberto Torrado, Chairman, ALSEA (a leading multi-brand restaurant operator in Latin America)
Figure 1: Mexico’s resilient growth stands out among other growth markets
Annual GDP growth of selected growth markets (%)
0.6% -3.8%
2014
2015 Russia
3.0% 2.9%
6.3% 4.0% 7.3% 6.8% 2.3% 2.1% Turkey 7.3% 7.3%
Mexico 0.2% -3.0% Nigeria China India 5.0% 4.7%
Brazil
1.5% 1.4% Indonesia
South Africa
Source: International Monetary Fund (IMF)
2 | Convenience matters – Serving the new Mexican consumer | PwC The Mexican economic resilience is The Trans-Pacific Partnership (TPP), The long-term growth of the Mexican buoyed by the economic recovery of its signed in October 2015 on the back of economy is primarily based on the northern neighbour, the US, combined the Pacific Alliance, holds potential for potential of the country’s demographics. with a sharp depreciation of the Peso a larger market for companies that have The Mexican population currently against the US Dollar, down 15% in already taken advantage of the comprises 127 million people, with a 2015.1 These two factors have enabled North American Free Trade Agreement third of Mexicans below the age of 15, Mexico to grow its automotive (NAFTA). The Pacific Alliance no more than 10% older than 65, and a manufacturing and export industry to agreement had previously granted median age in 2015 of only 27. These another level, which has partially offset Mexico access to a wider market beyond attributes position Mexico well to enjoy the impacts of the drop in global oil NAFTA, with reduced tariffs between an increasing working age demographic prices that threatened to slow the Chile, Peru and Colombia. Now, with the which will facilitate domestic country’s recovery, as revenue from its Trans-Pacific Partnership, Mexico will consumption and drive economic oil products contributed to almost a be able to expand trade beyond the growth (see Figure 2). third of the country’s GDP.2 Pacific Rim nations to new markets with reduced tariffs leading to further Mexican business leaders and economic growth. associations interviewed by PwC’s Growth Markets Centre as part of this study expressed optimism about the future of the economy; in particular, expectations for the future of the retail and consumer industry remain promising.
Figure 2: Mexico is in a good position to enjoy its demographic dividend
Population by age group (million)
Brazil Mexico China Age group
69.860+ 40.4 492.0 60+ 24.3 12.2 209.2
Change in working 132.7 95.6 674.0 population from 15 – 59 -2% 20% -28% 930.2 2015 to 2050 135.5 40.4
182.0 0 – 14 35.7 27.7 47.8 35.1 236.7
2015 2050 forecast
Source: UN Economic Commission for Latin America and the Caribbean (ECLAC)
PwC | Convenience matters – Serving the new Mexican consumer | 3 More than just tequila: Significance of the retail and consumer sector
Mexico’s retail and consumer industry is Mexico has witnessed significant growth Mexico’s economy (and with it the retail an important engine of its economy, in its middle class over the past 15 years.* and consumer industry) is brimming with household spending accounting for The World Bank estimates that the middle with potential. With a high contribution approximately 60% of the country’s total class in Mexico grew by 12% between of household spending to Mexico’s economic output.3 The sector’s growth 1995 and 2010, ranking amongst the economic output, supported by the has a tremendous impact on the highest growth countries in Latin America rising middle class, the retail and country’s economy, with retail sales (see Figure 3) and it is estimated to grow consumer sector is positioned to be a lifting Mexico’s 2015 Q3 GDP to a by a further 3.8 million households to key driver for Mexico’s long-term surprising 2.6% annual growth – the more than 18 million households by 2030 economic growth. fastest growth in two years. – a market equivalent to the size of all households in Spain.5 ‘Retail sales and consumer credit helped fuel ‘moderate growth’’, Banco de Mexico Governor Agustín Carstens said, bringing attention to Mexico not only as an export economy, but also increasingly a consumer economy.4
Figure 3: The growth in Mexico’s middle class is among the greatest in Latin America and the Caribbean
Change in middle class as a percentage of population (percentage points), 19952010
14.5
12.5 12.0 11.0 10.5 10.0 10.0 9.5 9.0
7.0
3.0 2.5
1.0
-6.5
Source: World Bank
* The middle class refers to individuals who fall between the working class and the upper class within a societal hierarchy. The World Bank defines middle class within the income bracket of US$10 – $50 per capita per day. Euromonitor defines it as the middle earning 10% of households (Decile 5 household)
4 | Convenience matters – Serving the new Mexican consumer | PwC PwC | Convenience matters – Serving the new Mexican consumer | 5 Mexico’s reforms: Is it still Mexico’s moment? The growth of Mexico’s retail and consumer sector and its wider market is happening against the backdrop of some significant structural reforms. President Peña came to power in 2012 promising a wave of reforms to boost economic development, and even though some of the benefits may not have reached their full potential, there are signs that retail and consumer companies are already benefiting from them.
To boost oil and gas exploration and production which has been in decline for the past 10 years, Mexico ended the 75-year state oil monopoly by opening the sector to foreign investment in 2013. It was envisaged that this move would increase long-term oil production by 75%6 and attract US$50 billion in investments by 2018.7 Oil The reform is also intended to increase competition and improve economic opportunities. reform Eduardo Reyes Bravo, a director with PwC Mexico’s infrastructure and energy practice, explained: ‘One of the key elements of the reform is to enable competition in the market,’ he said. ‘Competition should bring better prices to industry, which, in turn, can be more competitive, increasing exports, generating new employment and reducing prices in the local market.’8 Two years on, private companies in the upstream sector are still grappling with the mixed market response in the two rounds of bids for oil and gas exploration rights. However, it is the retail and consumer companies which are already reaping benefits in the downstream sector. With the new regulation that allows petrol station outlets to be privately owned, retailer Fomento Económico Mexicano (FEMSA), Latin America’s largest convenience store chain, has announced the acquisition of 227 gas station franchises. The acquisition seeks to complement the FEMSA-owned OXXO retail outlets which are located close to the gas stations. The operation of OXXO stores and the gas station outlets will generate greater consumer traffic.
Labour reform is another landmark change, introduced to increase market flexibility and reduce hiring costs, whilst improving productivity and market competitiveness. The labour reform intends to provide flexibility in the hiring and releasing of talent by allowing companies to cut severance payments, hire workers by the hour, introduce trial Labour periods of up to six months and address the issues of underperforming workers. The labour reform reform also includes a planned social security overhaul which aims to attract some of the workers from the ‘informal economy’ into formal employment. Even though companies will need to pay more in labour tax, the reform also brings about the flexibility to upscale or downsize its labour force to meet business needs. Companies are expected to benefit from a more efficient job market and an increase in productivity and, if the reform delivers on its promise to create an extra 400,000 formal jobs a year, it could increase economic growth by 0.3%.9
6 | Convenience matters – Serving the new Mexican consumer | PwC In a bid to confront obesity and diabetes, Mexico imposed a tax of one peso per litre of sugary drinks and an 8% tax on other high-calorie foods in October 2013. It was a major blow for carbonated drinks companies such as Coca-Cola and Arca Continental, which in 2014 experienced a decline in sales for the first time since 2008. In Sugar autumn 2014, Coca-Cola FEMSA cut some 1,300 jobs and increased prices by around 16% in tax its home market as a result of the sugar tax.10 However, there is belief that the sector will continue to enjoy growth in the long-term and this view is shared by some of the largest global fast-moving consumer goods (FMCG) players. Pepsi has since announced a plan to invest US$5 billion in Mexico over the next five years, while Nestlé in January 2014 announced plans to invest US$1 billion to build an infant nutrition factory in western Mexico.11 ‘The investment we are making is a clear sign of the commitment we have to Mexico and our long-term view of the market,’ Nestlé’s CEO Paul Bulcke affirms.12 While some of the initial excitement has been met with challenges, the market remains optimistic that it is still ‘Mexico’s moment’ and the reforms will bring material change in the long term. The Organisation for Economic Co-operation and Development (OECD) predicts that the reforms could increase GDP growth by one percentage point within five years of implementation (see Figure 4).
Figure 4: OECD predicts an increase in GDP growth by 1% upon successful implementation of reforms
Impact of reform on GDP growth in the medium term (% of GDP)* OECD estimates of legislated and envisioned reforms Impact after 5 years, assuming immediate implementation
Legal reform Additional impact 0.03 GDP Tax reform growth Employment 0.07 protection 1.0 0.03
Petroleum 0.45
Electricity and Gas 0.32
Telecoms 0.06 Product market Labour market Tax structure Legal reform Additional regulation reform reform cumulative impact on GDP growth
Pacto por Mexico Reforms
Source: United Nations, 2015
* The financial and education reforms are also likely to have a significant impact on growth (the latter mainly in the long term), but have not been included in the table because of difficulties in quantifying the impact.
PwC | Convenience matters – Serving the new Mexican consumer | 7 More pesos in the pocket: The sector takes off
Household consumption, which includes Following the rise of household spending on key consumer products such consumption, retail sales surged by as clothing, grocery and food and drinks, 6.8% in July 2015 from the same month has dropped 2.2% from 2012 to 2015, but in the previous year (see Figure 6), while is expected to rebound in 2016 (see the unemployment rate remained at a Figure 5) on the back of a drop in low 4.6% as of Q3 2015.13 In the same unemployment, a rise in real wages and trend, the consumer confidence index an increase in remittances.* This makes it reversed its previous gloom and rose to a an opportune moment for companies to three-month high in October 2015, enter or expand in the market to capture reflecting the increase in optimism on a share of the growing opportunity. the economic situation.14
Figure 5: Household consumption is set to grow with the drop in unemployment, rise in real wages and increase in remittance
Household consumption expenditure (current US$ bn), y-o-y growth (%)
400 365 15.0% 332 303 300 266 270 277 251 245 240 10.0% 8.3% 10.2% 9.8% 200 9.4% 9.7% 4.8%
5.0% 100 1.4%
0 0% 2012 2013 2014 2015e2016f 2017f2018f 2019f2020f
Current US$ bn -100 Y-o-y growth (% ) -5.0%
-200
-10.0% -300 - 11.0%
-400 -15.0%
* Remittance refers to personal transfers and employee compensation of workers who are employed in an economy where they are not resident and of residents employed by nonresident entities.
8 | Convenience matters – Serving the new Mexican consumer | PwC PwC | Convenience matters – Serving the new Mexican consumer | 9 A combination of a drop in The increase in remittances from the US unemployment, rise in real wages, and also adds to the rise in consumer the increase in remittances from abroad spending. In 2015, Mexican migrants are putting more pesos in people’s forwarded US$24.77 billion of pockets, leading to a consumer-led remittance, up 4.8% from 2014. recovery. While Mexico is enjoying Remittance contributes to lower unemployment rates, Brazil and approximately 2% of Mexico’s GDP, Chile face contrary winds. which is about a third of the value of Unemployment rates in Brazil and Chile automotive production in Mexico.16 both rose by 6.6% in 2015 according to IMF estimates. The number of formal This strengthening in consumer jobs being created in Mexico is 4.5% spending has helped drive Mexico’s higher than a year ago and wages have retail sales, and this can be clearly seen * also increased by 4.6%, while inflation in increase of same-store sales. Same is at its lowest in almost five decades at store sales in Mexico increased by 8.1% 2.5%, contributing to a favourable in December 2015 compared to the same environment for consumer spending.15 month in the previous year, more than the Mexican Association of Supermarkets and Department Stores (ANTAD) had anticipated. As these figures may not include the millions of Mexicans shopping below the taxpayer’s radar at the street market, ‘true’ consumer spending is likely to be higher.
Figure 6: Mexico is experiencing rising retail sales
Retail store sales performance (year-on-year % change, 2015)
14% 13.1% Same store sales 11.8% 11.5% 12% 10.7% 9.5% 9.8% 10% Total sales 8.7% 8.6% 8.7% 8.6% 8.7% 7.8% 8.0% 8% 6.8%
6% 5.5% 5.1% 5.2% 4.9% 5.2% 5.0%
4%
2%
0% Jan Feb Mar Apr May Jun Jul Aug Sep Oct
Source: ANTAD, The Mexican Retailers’ Association
* ‘Same-store sales’ compare revenues earned by a retail chain’s established outlets that have been opened for at least a year. Same store sales allow the company to determine what portion of the new sales has come from established stores, indicating that existing customers are coming back more frequently, spending more or bringing other customers.
10 | Convenience matters – Serving the new Mexican consumer | PwC The sector beckons: International companies are entering the market
The Mexican consumer story has ‘This is the right time to enter Mexico. already captivated many international The country has a stable economy, a players, with many more eyeing the strong middle class and a strong sense market as a hunting ground for new of premium brands with international consumers, which is creating anxiety names,’ David Leino, Senior Vice for companies to get ahead of the President of Global Real Estate for game amidst intensifying competition. Abercrombie & Fitch, was quoted as saying in Forbes Life Mexico.17 Major iconic brands are choosing Mexico to mark their debut in the With the rising market opportunities Latin American region. Mexico’s and increasing competition, both appeal reaches far and wide to foreign and Mexican companies need examples including the Swedish to develop market-relevant, flexible retailing giant Hennes & Mauritz business models to address consumer (H&M), US clothing retailer preferences in a profitable manner. Abercrombie & Fitch and online Should they fail to do so, companies retailing giant Amazon. Dunkin risk being vulnerable to the changing Donuts also announced an aggressive priorities of demanding consumers, comeback after five years of absence emerging channels and new entrants. from the market.
PwC | Convenience matters – Serving the new Mexican consumer | 11 Convenience matters
It is often said that Consumers within both the formal and The value of convenience is growing informal economy share similar values with the hectic pace of work and heavy there are two and needs. For companies to fully traffic in the Mexican cities affecting all capitalise on the projected growth of the consumer segments. Higher numbers of Mexicos – one Mexican consumer market, they need working women also increase the developed and first to appreciate what both these demand for convenience as they have consumers value most. less time for grocery shopping, formal, and another housekeeping and taking care of less developed and The confluence of a growing middle children. Consumers are time poor and class and rising disposable incomes has are looking for efficient shopping more informal, set the foundation for a gradual but experiences which also provide what sustained growth in consumer spending. they want at the price they want. but consumers from Consumers across both the formal and Convenience is greatly valued and both sides make up informal economies are becoming consumers are willing to pay a increasingly affluent and well-informed, premium for it. Mexico’s growing making them more demanding in terms of what they want to spend their money The growth of the convenience store middle class who are on. This prompts a shift from purchasing sector is already a testament to this seeking products decisions driven by price alone, and trend. One in four retail dollars is spent convenience is increasingly valued in in a convenience store in Mexico,18 and services that purchase decisions. expanding the market at a compound annual growth rate (CAGR) of 5.1% appeal to what through 2009-2014. The demand for they value. convenience has also influenced how major supermarket retailers grow their business. In Mexico, you can just as easily buy a motorcycle at the same place where you buy a mattress for your bed, all in one location in a store such as Grupo FAMSA.
12 | Convenience matters – Serving the new Mexican consumer | PwC View convenience To address the gap in convenience To successfully differentiate from their through the customer between the retail and car rental competition, companies need to break lens experience, AVASA made a bold move away from industry norms and adopt a and established an exclusive partnership consumer lens to explore how to The appeal to convenience ought to be with Walmart to operate at its 268 improve convenience for consumers. considered beyond the typical ways stores. With the agreement, AVASA is Convenience is increasingly important companies serve their customers. able to run a rental facility that houses in the Mexican market. Companies will Consumer needs often lie across seven vehicles at each station. AVASA need the right merchandising, client industries, companies therefore need to also managed to advertise inside the segmentation practice and technology to adapt to address this. For instance, supermarket and provide for the use of best align their offering to appeal to the someone going on a short trip overseas Walmart credit cards for car rental. increasing focus on accessibility of will need to interact with multiple The partnership between companies goods and services. vendors such as car rental firms, hotel from the car rental industry and the accommodation and tour service retail industry has positioned Hertz at providers. However, Mexicans are closer proximity to the local market, ultimately concerned with the end-to- smartly integrated into daily lifestyle. end experience, which can be addressed by partnerships across industries. Recognising a similar gap in convenience between the public The Hertz franchisee AVASA recognises transport and car rental industry, the unmet need and brings its rental AVASA also ventured into bus terminals, vehicles closer to the Mexican end user. making it the first such model between a Traditionally, car rental companies car rental and a bus terminal in Mexico. concentrate on providing convenience Convenience is an important factor for through improving their website car rental, whether in the tourist or local interface and offering more varied market. AVASA sited itself right at the payment options. However, the greatest nexus of transportation transfers.19 inconvenience for consumers lies in the AVASA’s comprehensive interpretation geographical distance between retail of the value of convenience led it to stores and transportation nodes. revise its business model, differentiating it from its competition.
PwC | Convenience matters – Serving the new Mexican consumer | 13 One consumer – A good way to characterise the market multiple needs and as consumers live moment-to-moment is motivations to do so through the buyer’s motivation for specific trips. Retailers can capitalise Mexican consumers have multiple needs on true, in-the-moment motivations to to be met at different times of the day. customise the product categories and For example, a woman walking into a even the size of the product to carry. convenience store in downtown Paseo This way, retailers can provide real de La Reforma on a Tuesday at 12pm is value at the right place at the right time. probably looking to buy a sandwich in They can also optimise their precious between her corporate meetings. The shelf space on products that actually same woman walking into a matter. By segmenting the market by convenience store on a Sunday evening trip motivations, it opens up possibilities might be replenishing the body shampoo not only to streamline stock-keeping that she forgot to buy earlier in the week units (SKUs), but also to tailor front-door (see Figure 7). Consumers have different product placements and bundled needs and their buying motivations promotions in the morning versus differ depending on the needs they have during lunchtime or at night. at a given context, location and time. By segmenting the market only by consumer groups, companies risk overlooking the latent motivations that differ at each trip and create real value which appeals to their needs at the moment.
Figure 7: Mexican consumers have multiple needs to be met at different times of the day
Example of a typical Mexican consumer journey in a week
Morning Buying breakfast on the way to work
Noon time Buying lunch in between meetings Preparation for Grocery family / shopping Taking a break friends Afternoon gathering Replenishing the office pantry
Preparation Evening Picking up daily household items for gathering
MOTIVATIONS CravingHThirst unger Gathering Daily needs
Need for volume Need for instant gratification / time sensitive
14 | Convenience matters – Serving the new Mexican consumer | PwC Case study: OXXO designs convenience outlets to cater to different trip motivations To provide consumers with the convenience they desire, OXXO takes an additional step beyond consumer segmenting to trip motivation. It designs its points of sale around the buyer’s motivation on the trip – thirst, craving, hunger, reunion and daily Convenience is increasingly important to the rising middle class among needs. For example, breakfast items Mexican consumers, due to increasing affluence and a hectic lifestyle. are given prominence in the morning Companies need to reassess how they deliver these values through the nearer to hospitals and working customer lens and recognise the differing needs of a consumer. The ability to areas. Two-litre bottles of soda are understand the market through various means, such as via employees, as well provided where there are people as the ability to connect to the market through the local culture, will put gathering and pantries need companies ahead of their competition. replenishment. Home stores get more Convenience is equally important to both the informal and the formal grocery space while working area segments. However, companies in emerging markets often focus on the formal stores get more space for snacks. segment in the growing middle class to capture opportunities, leaving the OXXO stayed close to the nine million informal market overlooked. The informal market shares similar purchasing shoppers it served daily with a keen power and values and is likely to be attracted to similar value propositions. understanding of what they want. For example, it drives promotional and bundled offerings by offering cigarettes with a free lighter, or a bottle of soda bundled with a discounted energy drink.
PwC | Convenience matters – Serving the new Mexican consumer | 15 In the shadows: The vast informal market
The Mexican growth What defines the informal These people in the informal market market? also form part of Mexico’s growing middle class. However, companies often story is often Like many growth markets which have overlook their existence as potential matured from a largely informal accompanied by an consumers as they appear risky and economy to a more structured one, a hard to address. This is mainly due to undertone of the large part of the Mexican population the fact that they do not have any health still falls outside the formal economy. shadow market insurance, social security or labour which remains The Mexican informal economy consists rights protecting their jobs, and hence of unregistered and mainly small they remain under the taxman’s radar. largely unseen. businesses. Amongst them you will see Despite this, some share similar earning the seller of stuffed maize patties, also power and values to those in the formal known as ‘tlacoyos’, along a downtown market, which presents an untapped sidewalk, or the owner of a small market opportunity. family-owned restaurant. What then differentiates a consumer in Members of Mexico’s informal economy the informal market from the rest? include 25% of the 105,000 taxis on the Consider Arturo and Ricardo road, as well as 60% of the construction (see Figure 8). housing workforce. These people not only make a living outside the formal employment sector, but also have no bank. 60% of Mexicans do not have bank accounts, but instead keep their money in a community saving club or at home earning no interest at all.21
16 | Convenience matters – Serving the new Mexican consumer | PwC Figure 8: Comparison of a typical Mexican consumer in the formal and informal sector
Formal sector Informal sector
Arturo Ricardo
Age and gender 35, Male 35, Male Identical profile, Consumer would likely be Job Restaurant waiter Restaurant waiter profile attracted to similar selling propositions Household structure Married with a child Married with a child
Gross annual salary (US$)* 8,800 5,808
Less: Income tax (~17%) 1,145 0 Earning Less: Social security power 812 0 contribution (~9.23%)
Net income 6,842 5,808 Comparable earning power Payment of tax Yes No Unequal rights. Access to credit Yes Limited Limited access to credit Obligations affects purchasing and rights Health insurance Yes No power in the informal Employment contract and Yes No market rights
* Estimates based on the study on formal and informal market by Jorge O. Moreno Trevino22, and study on the Income Differences on Mexico’s Northern Border by Rogelio Varela Llamas23, for indicative illustration only. Based on exchange rate as of 5 February 2016, 1 USD = 18.271 MXN
As you can see, consumers in the formal pay than Arturo for a similar skillset and Ricardo will find it difficult to borrow and informal sector can have a similar job, they broadly fall under the same from a bank. As a result, he takes longer consumer profile, needs and purchasing band in terms of earning power. to save up for big household expenditures power. Both ‘Arturo’ and ‘Ricardo’ are of such as buying or renovating a house, However, a lack of access to credit can the same age and are supporting a family and purchasing a car. Consumers such as limit purchases by consumers in the with a child. Value propositions that Ricardo will need to pay for items in cash informal market. Due to a lack of credit appeal to Arturo in his purchasing will and in full, or with a larger deposit if history and official employment likely appeal to Ricardo as well. Even they have managed to get access to any documentation to establish credibility, though Ricardo might have slightly lower form of credit.
PwC | Convenience matters – Serving the new Mexican consumer | 17 What makes the informal In 2014, Mexico’s National Institute of shunned by banks. The national market so attractive? Statistics and Geography (INEGI) made association of supermarkets, ANTAD, its first estimation that the informal estimated that the sales by informal While most Mexicans in the informal economy contributed an average of 26% stores might be four times the level of market have a relatively lower income of the gross domestic product (GDP) modern-format store sales. than their counterparts in the formal over the decade from 2003 to 2012. The market, the collective population informal economy has been growing at To enhance the success of their market represents a market with latent demand 2.2% on average in the ten years penetration, retail and consumer to be explored. Mexico has one of the considered, just slightly trailing the companies need to gain access to the largest informal economies in Latin 2.76% recorded for the economy as a Mexican consumers in the informal America (see Figure 10), and it makes a whole (see Figure 9). These businesses market whose needs are waiting to be significant contribution to the economy. employ approximately 30 million people addressed. However, it will take some – six in ten Mexican workers – who are time before the Mexican government can wrestle through the labyrinth of issues to Figure 9: The informal market has a significant presence in Mexico lift Mexicans out of the informal market.
Average GDP growth rate from 2003 to 2012 So what can companies do in the meantime to address this untapped potential in the informal consumer market, and also to support the government in accelerating the inclusion of this sector of society? Whole economy Informal Addressing the informal market market (Contributing to The informal market is often perceived 26% of whole to be a land of challenging opportunities economy GDP) where many commercial propositions struggle to take off. The first step in 2.8% 2.2% addressing the potential of the informal sector is to break the stigma and
Source: Mexico’s National Institute of Statistics and Geography (INEGI) recognise that some of the consumers in the informal market are not too different from the ones in the formal market. As Figure 10: Mexico has one of the largest informal economies in Latin America such, the informal market can potentially be an expansion of what was offered to Contributors or affiliates of pension as a percentage of total workers aged 15-64 years (%, around 2010) the growing middle class (see Figure 11). (Smaller percentage indicates a proxy for larger informal market)
Chile 70% Brazil 61%
Argentina 51%
Venezuela 41% Mexico 35%
Peru 17% Colombia* 31%
Ecuador 27%
* Only 8 largest Latin American economies are displayed, based on GDP Source: OECD, 2012
18 | Convenience matters – Serving the new Mexican consumer | PwC Figure 11: Companies’ proposition to the middle class can potentially be expanded to the informal market
Mexican population by income segment (Household income per month, % of population, 2012)*
A/B 7% US$5,900 and above
C+ 14% US$2,400 - 5,899
C US$800 - 2,399 17% Informal market, Formal C- 47% market, US$640 - 799 17% 53%
D+ US$470 - 639 19%
D/E US$469 and below 26%
-20-10 01020 Million
Population in formal market Population in informal market
Source: FAMSA Information Memorandum 2015, IMAI 2012
* Indicative based on data from FAMSA Information Memorandum 2015 and IMAI, with market extrapolations24 Based on exchange rate as of 5 February 2016, 1 USD = 18.271 MXN
However, the informal market holds additional credit risks that companies Credit penetration in Mexico need to address. Even though some in Mexico notably has among the lowest credit penetration in Latin America, as the this segment have a similar earning large informal economy shuts many consumers out of the system. Many who do power to the Mexicans within the formal not report income to tax authorities have problems establishing their credit sector, only 30% have an earning power history to justify lending. While Brazil’s GDP per capita is about 15% higher than that can be ascertained – which poses a Mexico’s, it has three times the number of banks per 10,000 people. 95% of challenge to credit assessment. business in Mexico is made up of microbusiness, of which only 7% are in the formal sector with access to credit.25
So how can companies By operating beside retail outlets, retailers purchase, as well as to minimise the default penetrate the informal are able to increase their sales by targeting risk that the company is facing. As most market in a way that the consumption moment, triggering customers do not have access to banking spending when they need it most. systems, they will make a physical trip to mitigates risk? the stores to pay, therefore creating more This is where large retail businesses which Credit risk can be managed in innovative opportunities to cross-sell. have established or are able to develop ways. To establish the borrower’s lending facilities, such as Grupo FAMSA, credibility, companies can approve or reject The synergy of a retail business with credit are well positioned to capture the financing based on testimonials from the facility helps the company to capture opportunity. The unbanked population borrower’s employer, family and friends, as demand in the informal market. Unlike visits retail stores such as FAMSA well as an initial down payment. Very banks, which operate under intensive frequently and these interactions are an often, Mexicans cannot pay back a loan in banking regulation, the retail business does integral part of life. Retailers such as these the prescribed time due to irregular income not have to subject customers to complex are in a good position to address the issue and poor financial management. By rules that they do not understand. The of access to credit as they have deep arranging for weekly payments instead of business model can also be built around the knowledge of the consumers who visit their monthly payments to break down the value behaviour of this large consumer group, for stores, as well as a good understanding of of each payment, companies instil a sense example, being open every day to cater to the risks that they are willing to bear. They of discipline in the repayment routine. An their customer base which often rely on can also set up bank branches quickly at a initial down payment is arranged to ensure daily earnings. low cost within their existing storefronts. the borrower’s commitment to the
PwC | Convenience matters – Serving the new Mexican consumer | 19 Case study: Grupo FAMSA FAMSA staff identify the target addresses the informal districts within a specific distance market through credit from each store. They then knock on doors and explain that they can offer With over 370 stores in more than store credits on favourable terms. This 75 cities throughout Mexico, Grupo is followed by an assessment of the FAMSA is a large Mexican retailer of person’s creditworthiness using key household goods, ranging from questions captured via a mobile furniture, electronics and clothing to device. Their answers are evaluated cellular phones and even over 72 hours so the person quickly motorcycles. It provides credit to the knows if they can acquire credit at mass market, which can depend on it their local FAMSA store and if so, how to buy daily necessities. much. The approval is followed by a ‘The business is well adjusted for the separate team which goes to the house consumers in the large middle-low to offer the products. This approach income group. With FAMSA, they do has proved to be effective and door-to- not have to deal with rules that they door sales are already chalking up do not know. FAMSA is open every day 10% of FAMSA sales. to cater to the customer’s needs,’ says Understanding that the majority of its Luis Gerardo Villarreal, the Chief customers do not have an official Operating Officer of Grupo FAMSA, a credit history, FAMSA also adopts leading retailer in Mexico. techniques to manage credit risks. With the right use of credit, companies Companies such as FAMSA are also can further expand their market working closely with the regulatory presence. For instance, FAMSA body to help them gain proactively uses credit as a key lever to understanding of this credit expand its market presence landscape in the informal market. (see Figure 12). It has developed loyalty programs, a revolving credit and normal credit to different segments for different trips.
Figure 12: Approaches and techniques used by FAMSA Mexico to manage credit risks
Focus area Techniques used
Establish credibility Review testimonials from the borrower’s employer, family and friends
Request an initial down payment
Facilitate financial management Arrange for weekly payments instead of monthly payments to break down the value of each payment and to instil a sense of discipline in the repayment routine
20 | Convenience matters – Serving the new Mexican consumer | PwC Global best practices: Managing credit risk in a retail business in Brazil There are several ways companies can formal employment records (see leverage credit while keeping credit Figure 13). The Growth Market Centre risk managed. Let’s take the example Series: ‘The Retail and Consumer of Casas Bahia, a retailer in Brazil. It industry in Brazil – Navigating the has trained its employees to assess the downturn’ provides a deeper insight creditworthiness of a potential on how the business works.26 customer without a credit history or
Figure 13: Approaches and techniques Casas Bahia used to manage credit risks
Focus area Techniques used
Establish credibility Ask technical questions to determine if borrower is telling the truth
Provide a physical passbook that is easy to carry to provide easy reference and Facilitate financial management reminder to customer to pay
Provide financial advice Provide advice on which products to choose to suit affordability
The informal market holds untapped potential which is supported by consumers with similar earning power to those in the formal market, who are likely to be attracted to similar value propositions. With the right approach to address credit risks, the company’s market development efforts can reach a wider audience and reap greater potential returns.
Companies looking for success in the Mexican retail sector need to consider new ways to grow by understanding the market dynamics and its needs. As such, it is critical to develop a flexible business model which will allow companies to respond effectively to market changes.
PwC | Convenience matters – Serving the new Mexican consumer | 21 Building capability muscles and aligning your operating model
The right business times of more moderate growth such as The average Mexican is younger and has we have seen in certain growth markets more disposable income than before and model for Mexico’s during the latter part of 2015 and early their needs are very different from 2016. While it is common for companies others. Convenience is greatly valued retail and consumer to retrench during challenging times, today and retail organisations need to market and focus on operational efficiencies to identify and address this now, while also improve their bottom line, they need to keeping a close track on future In order to address the ever-evolving be careful not to assume that consumer transitions. Being out of sync may lead values of Mexican consumers across needs and values will remain to a significant risk of missing out on both the informal and formal segments, unchanged during this period. This is market opportunities and losing the organisations (both foreign and because consumer segments in growth customer mindshare. Mexican) need not only to ensure that markets such as Mexico are quickly they are in touch with what consumers evolving and this is further complicated value, but also to develop holistic and by the fact that consumers are moving flexible business models. These models between segments at a faster rate than must address changing consumer values in developed markets (see Figure 14). in times of high growth, as well as in
Figure 14: Consumer segments in growth markets vs developed markets
Developed markets Growth markets
In addition to evolving consumer needs, being leaders in growth markets However, some aspects of its flexible business and operating models (see Figure 15). Specific to Mexico, one implementation have proved tricky; need to be developed with the of the challenges in business conditions such as organisations finding it difficult recognition that the business has been certain gaps in the execution of to ‘prove’ employee underperformance environment in growth markets is large-scale initiatives and reforms. The in practical terms in order to achieve the constantly maturing. There are still a labour reform is one such example – this intended benefits. Such execution gaps number of institutional voids that landmark reform was expected to have mean that companies still need to have a prevent those business models which an immediate and significant impact on customised approach to employee hiring made foreign companies so successful in improving flexibility in hiring, thereby and retention, until all aspects of the their home markets (developed) from creating a more efficient job market. reform are well implemented.
22 | Convenience matters – Serving the new Mexican consumer | PwC Figure 15: Business environment in growth markets vs developed markets
Developed markets Growth markets
Customisation and flexibility to adapt to 1. Short-term flexible plans Figure 16: Key factors in the changing the local environment are critical to consumer needs and maturing business 2. Enhancing impact through success, and therefore there is an urgent environment partnerships need for organisations to have a separate Younger Rising Changing 3. More local decision-making operating model for growth markets; population disposable consumer with different elements designed to incomes values 4. Need-based innovation and cater to changing consumer needs and Consumer profile and needs adaptation the maturing business environment 5. Employee alignment and retention Growth markets operating model (see Figure 16). 6. Need for ‘practical’ technology Business environment In the following paragraphs we Legal and tax Institutional Evolving highlight some of the aspects within reforms voids labour market each of these operating model The major elements of a growth markets components which retail and consumer operating model are provided in the companies should consider in order to figure below. Amongst these, the be successful in the high potential but following are especially relevant for the competitive market in Mexico. Mexican retail and consumer industry:
Figure 17: Operating models in growth markets vs developed markets
Operating models for developed markets Operating models for growth markets
US
2045
2040 MD 5 1 203 0 5 2
Director APR 2 MAR 030 N FEB JA G AU Y JUL 20 Manager JUN 25 MA V T DEC NO OC US 2020 SEP 6 1 0 2 2015 APR MAR Assistant N FEB JA 20 G 10 AU Y JUL DE UK FR JP JUN MA 2 V ID IN CN BR 00 T DEC Child Care 5 NO OC SEP 7 200 1 COLA COLA 0 ENTER EXIT 0 2 ENTER EXIT APR COLA MAR
G COLA COLA AU
V T DEC NO OC SEP
Developed markets Growth markets
PwC | Convenience matters – Serving the new Mexican consumer | 23 1. Short-term, flexible plans 2. Enhancing impact through important part of the local community. The overall requirement is for partnerships Partnering (instead of competing) with these small, local stores can be mutually companies to be flexible and nimble by In many cases organisations invest beneficial and may provide a significant quickly understanding changes in the heavily in enhancing in-house advantage to large retail players towards market environment and identifying capabilities and processes; however, this increasing market penetration. what is of value to the customer; such as is time consuming and results are not improved local presence, SKU always guaranteed. Identifying areas of availability, variation in product core competence requiring internal portfolio based on time of the day etc. focus and those which can be developed Regular and frequent planning cycles through external partnerships is allow firms to closely monitor market essential to improving operational The way to grow is changes and recalibrate their way effectiveness. Subsequently, the forward accordingly. This is especially management of relationships with to support the small important in Mexico given the rapid partners also plays a much more central companies in their shifts in demographics which have led role in growth markets. While processes to frequent changes in customer needs and structures are indeed very development the and values. important, managing and enhancing same way the big relationships with partners can also help As mentioned earlier, customers now in driving quick alignment and often companies came in attach a lot of importance to leads to delivery beyond expectations; to develop. convenience throughout the buying thereby creating incremental value for process, and organisations which can customers. quickly recognise this and customise Eduardo Padilla, their strategy will gain over others in In the Mexican retail and consumer Chief Financial and Strategic the market. A sudden change in business sector, the scope for partnerships can Development Officer, conditions is another reason to be extend beyond the normal vendors and Fomento Económico Mexicano (FEMSA) nimble – for example, the sugar tax suppliers and include potential (which operates OXXO, a leading imposed in Mexico had a significant competitors as well. The informal convenience store chain in Mexico) impact on food and beverage companies. market is quite large in Mexico, But leading players such as Pepsi and contributing about 26% of the overall Nestlé have been able to quickly adapt to GDP – typically traditional retail outlets the new business environment and (local stores) have been close to this continue to focus on growth and section of consumers and form an investments in the country.11
Case study: Large Not far away in Colombia, a major Eurocash SA, a leading wholesale retail supermarkets partner with supermarket and convenience store company from Poland, is another smaller companies to develop retailer Grupo Éxito has launched a example of this trend. To capitalise on the growth markets sustainable commercial initiative the opportunity in the neighbourhood called the Aliados Surtimax where it grocery stores where locals tend to Out of its 10,000 stores, Walmex partners with owners of Colombian shop four to five times a week on operates about 2,300 stores in Mexico, minimarts. Under this business model, average, Eurocash partners with making it the second biggest market Grupo Éxito provides technical advice traditional trade retailers as for the retailer after the US. Walmex on retail display, space planning, franchisees under its abc convenience has concluded a provider assistance merchandising, access to a portfolio of store and Delikatesy Centrum stores. agreement to the small and medium- private brands, and the Surtimax This positions the company to gain sized food and drink providers in signage. At the same time, Grupo Éxito from the growth of the traditional Mexico to meet its objective of stocking benefits from the network and trade.29 domestic products. Under this personalised service of the traditional arrangement, Walmex provides loans trade while minimising initial and other services such as logistics, investment. Grupo Éxito has built a business and production process network of more than 500 stores at a assistance, connecting to the smaller low capital-expenditure rate of less businesses which may otherwise not than US$500 per store.28 have sufficient infrastructure to supply to Walmart.27
24 | Convenience matters – Serving the new Mexican consumer | PwC 3. More local decision making day-to-day basis vary immensely and Achieving the right balance between are almost impossible to predict. This It is important local and global decision making is a can include an odd request from a major challenge often seen with multi- valued customer, or a sudden inventory to emphasise national organisations. Typically, most crisis brought about by supplier accountabilities, companies in growth markets operate oversight or error. Effectively dealing “ within a narrow range – where at one with these in a timely manner involves not tasks. end, the local partner has a small impact empowering the person best equipped to Empowerment on decision making and is more of a address the challenge, which is most caretaker; while at the other where the often the store or operations manager will help you move local business is coordinating and situated locally. Appropriate delegation around fast. driving synergies, but still does not have of authority to the local team can go a any real P&L control. However, the long way towards ensuring more Eduardo Padilla, evolving customer segments and efficient operations and a better Chief Financial and Strategic changing needs in Mexico, as well as the customer experience. Development Officer, maturing business environment, requires Fomento Económico Mexicano (FEMSA) slightly more control and responsibility (which operates OXXO, a leading to be delegated to the local entity, where convenience store chain in Mexico) they can play a key role in the decision making, raising the territory’s profile at to operate. For example, in OXXO, the global board level and controlling the Case study: OXXO localised stores are being graded based on their local P&L as well. decision making to each of its convenience stores – empowering performance, and those graded ‘A’ will In addition to local decision making at a them to manage the business be given more autonomy to operate. corporate level, local decision making at This provides a greater sense of an operational level is also important in Localised decision making is not ownership and facilitates faster the retail sector. In the Mexican retail merely important between global and decision making, which helps the sector, the situations which operational Mexican counterparts in a foreign business respond fast in the market managers encounter on the ground on a company; it is also applicable to Mexican companies. and relieves managers from time spent managing day-to-day OXXO leverages empowerment to operations. motivate its staff. In OXXO, as well as empowering ground staff to address operational issues, stores that perform well are also given greater autonomy
PwC | Convenience matters – Serving the new Mexican consumer | 25 4. Need-based innovation and modifications required. This would allow often unclear) to department Key adaptation for rapid innovation, leading to the Performance Indicators (KPIs) and revised product/service being launched subsequently to individual Key Result Developing new products in growth within a shorter turnaround period. Areas (KRAs). This may lead to a peculiar markets does not always require situation where employees (at the local extensive investment in research and store or warehouse) may have met their development. Instead, it is important to 5. Employee alignment and misaligned targets but still do not get customise product and service offerings retention rewarded appropriately due to lacklustre (often at low cost) swiftly based on A progressing economy and a fast- business output; leading to lower market feedback. This is required growing retail and consumer industry motivation and sub-optimal performance because of frequent shifts in consumer provide ample employment opportunities going forward, and finally attrition. need and values, typically seen in for Mexico’s large working population. markets such as Mexico, which therefore Organisations here face significant Strategic deployment and alignment of requires retail and consumer companies attrition, and filling in the gap requires goals throughout the organisation helps to reinvent their product to cater to the additional time and monetary resources ensure that individuals and departments ‘new’ market requirement. This sort of to be spent on hiring and training new are always linked to the bigger picture frequent ‘innovation’ requires a flexible employees. One of the leading causes of and are aware of the role they are organisation/product strategy, supported attrition in emerging markets is the lack expected to play towards achieving it. by close working between the sales, of alignment between the employee This also ensures that employee success product and strategy teams to quickly target metrics and overall business goals. and rewards are closely linked to the obtain market insights and feedback, Quite often, company goals are not company’s success, creating an understand the changes in consumer properly aligned (or the linkages are environment of improved accountability needs and the corresponding and motivation.
Case study: Diageo Mexico thefts in the store. Diageo innovates to stay ahead of the implemented this in 2014 over 13,000 convenience trend stores at a low cost. According to Andy Robertson, Diageo’s Global The expansion of the convenience Route to Consumer Director, the channel with smaller formats also business grew 10 percentage points poses a new challenge for product faster than the control set. The companies. They are trying to best success represented a new growth of manage the limited retail shelf space the spirits market as a category, and available, while also competing not simply brand switching within an against other suppliers vying for a established category.30 share of sales. Diageo, a global leader in alcoholic drinks, rose to the challenge with the development of a new display – a postcard rack showing the array of products available. Shoppers can take the postcard to the cash register where it is exchanged for the product. This way, the two- dimensional card can optimise precious space in the small box while getting the product in front of 10 million consumers walking into convenience stores across Mexico.
The space-efficient rack provides flexibility in positioning, and is often situated in high traffic areas, typically around beer, ice and chips. This idea also addressed the issue of product
26 | Convenience matters – Serving the new Mexican consumer | PwC Case study: Leading Mexican a self-balancing mechanism to convenience chain adopts addressing conflicting issues. shared KPIs to ensure delivery It is important of value For example, store performance is a to let the people common KPI across functions within The leading convenience chain OXXO FEMSA. The FEMSA logistics team is “ know that they effectively uses shared KPIs to ensure accountable for both inventory levels are part of the product availability – a key customer and customer service. To ensure better proposition. This is difficult due to customer service, the logistics team system, and that limited shelf space in the small store only delivers during quieter times the system is format which needs to be optimally before peak hours so that store staff are utilised to ensure that supply meets not distracted from serving customers. affected by the demand. The ability for timely interaction at replenishment in small formats with The success of the approach has not limited storage space became the only freed up store managers’ time to every point. primary customer value proposition focus on business objectives, it has and the key to success for OXXO. also empowered the ground staff to address operational issues. The Eduardo Padilla, It is not easy to nurture the culture in ground staff feels accountable to Chief Financial and Strategic its operating outlets across the whole greater responsibilities and avoids Development Officer, of Mexico. One way OXXO has made it developing tunnel vision on specific Fomento Económico happen is to institutionalise shared tasks. Adopting a shared KPI is an Mexicano (FEMSA) KPIs. A shared focus on business approach to put everyone on the same (which operates OXXO, a outcomes will drive employees to find path, empower and motivate the leading convenience store the optimal solution to achieve the workforce to deliver on the promise of chain in Mexico) end objectives. Most importantly, convenience to the customers. these shared KPIs are identical to the management’s objectives and serve as
PwC | Convenience matters – Serving the new Mexican consumer | 27 6. Need for ‘practical’ It is critical that the right solution is technology deployed to address user needs, and provide a good working experience Consumers in Mexico increasingly value within the constraints of available convenience, and technology can be a infrastructure. Overall, using ‘practical’ key enabler towards providing an technology solutions which focus on enhanced experience throughout the improving customer convenience will customer journey. But simply deploying lead to wider adoption and usage. In global off-the-shelf products can often today’s digital age, online and mobile- have the opposite effect; with users enabled applications are a viable option viewing the solution as cumbersome and towards achieving this objective – being unnecessary. This viewpoint is mainly cost effective and offering better driven by poor infrastructure and flexibility for local customisation. ill-designed product features which are misaligned to local need.
Case study: Grupo Modelo orders via a phone call, online or by rides digital trend in Mexico downloading a phone application. Modelo CEO Ricardo Tadeu said the Anheuser-Busch InBev-owned Grupo company is ‘betting on the Modelo has ridden on the digital trend digitalisation of consumption’. by launching an online commerce site in Mexico for craft beers in early 2015. The investment reflects the It has also developed mobile confidence the company has in the applications for beer ordering and future where people will buy even delivery status updates to meet the more products through their phone surging demand for spectator sports and mobile applications, to have them events such as the FIFA World Cup and delivered minutes later, appealing to the Olympics. The company quickly young Mexicans’ need for followed up with a rollout of the convenience, quick gratification and digital home delivery service via its mobility.31 Bud Light brand in Northern Mexico in August 2015. Customers can make
28 | Convenience matters – Serving the new Mexican consumer | PwC The winning concoction: Local knowledge, global expertise Building strong This can be built either by hiring Foreign companies are looking for leaders/teams with relevant expertise or capable franchising partners who capabilities requires through partnerships with other leading manage a portfolio of brands, with companies. Each of these approaches experience both of the local market and time and has its own advantages and challenges, in dealing with foreign brands. In turn investment, but the but we see a rising trend in retail these local companies are no longer organisations entering into franchising satisfied with a foreign company only more critical partnerships to complement and learn bringing in a global brand. They are now ingredient is from each other’s strengths. looking for more investment in the form of capability enhancement and best ‘know-how’. In the Mexican retail and consumer practice. Merchandising strategies, sector, franchising is a prevalent way to retail supply chain management, build capability. According to the operational efficiency and customer Department of Economic Development of relationship management are some of Missouri, the franchise sector grew the most important capabilities in the between 9 and 12% in 2013, retail and consumer market. In Mexico, contributing significantly to the R&C organisations are seeking to country’s economic growth. The Mexican develop focused capabilities through Franchise Association also believes that specific partnerships, and then looking franchise laws and regulations are well to utilise these capabilities and learnings The business defined to support the approximately across the entire portfolio of businesses. gains expertise 1,200 franchise concepts. “ and best practices Case study: ALSEA develops ALSEA’s dominance in a fragmented from different strong operating restaurant industry is supported by capabilities through strong operating capabilities global partners foreign partnerships developed through its growth, as with strong well as through foreign partnerships. One such example is ALSEA, the ALSEA has built its strengths in the capabilities in leading multi-brand restaurant knowledge of the local consumers, specific areas operator in Latin America, which has relationships with vendors and a number of well-known franchises access to capital to develop its like technology, under its umbrella, including leading business in the region. As an customer global brands in the restaurants established company holding business. The US$ 1.7 billion multiple brands diversified across relationship company operates more than 2,700 geography and income segments, management units of restaurant chains in Mexico, ALSEA also deliberates on the key Spain, Chile, Argentina, Colombia capabilities each additional brand is and kitchen and Brazil. willing to invest that benefit the efficiency. business as a whole. Figure 18 highlights the key capabilities each brand brings to the portfolio. These capabilities, when put together, Alberto Torrado, complement each other as they fill in Chairman, ALSEA capability gaps to succeed in an (a leading multi-brand emerging market. restaurant operator in Latin America)
PwC | Convenience matters – Serving the new Mexican consumer | 29 Figure 18: Filling in capability gaps through separate partnerships
Filling in capability gaps through separate partnerships
Short term, Need-based Process & Practical flexible plans innovation & manual technology adaptation operations
Workable governance Employee & acceptable alignment reporting Enhancing and impact More local retention through decisioning focused partnerships benefits
Maturing business environment
In-house In-house In-house In-house Partner 1 Partner 2 In-house Partner 3 capability capability capability capability capability
Customer Kitchen Technology relationship e ciency expertise to management capability to improve capability to enhance processes understand local and operations adapt to Mexican consumers
Developing world class capabilities across the portfolio
30 | Convenience matters – Serving the new Mexican consumer | PwC Unlocking the enablers for growth
During this period of unpredictable and To retain the loyalty of a busy Mexican uneven growth across the developing consumer, regardless of which segment markets, Mexico stands out as one of the he or she is in, companies need to go key markets weathering this storm, beyond just understanding what goods particularly in the retail and consumer they want and providing the financial market. There are significant long-term measures to purchase these, but also growth opportunities within the make it convenient across each Mexican retail and consumer market, purchasing occasion. not only across the formal segments of middle class consumers, but also in the Developing a flexible business model informal segment. However, to address which understands these diverse both of these groups successfully, consumer groups and their convenience companies need to adopt more needs is challenging for any foreign innovative business models, which company entering the Mexican market. incorporate specific capabilities, such as Here, finding the right local partner is providing access to consumer credit for key. However, a strong brand is not those who find it hard to access credit enough to secure such a partnership, as through the traditional channels. local Mexican companies are seeking partnerships which will enhance the Retail companies like FAMSA have maturity of their own capabilities. managed to identify the right balance of Companies looking to succeed in this risk which they are prepared to digest attractive but complex market must be when addressing this segment. They equipped with more than just a global therefore feel confident in leveraging brand. They also need a set of world their other capabilities such as deep class capabilities which can be adapted consumer knowledge and wide reach. to strengthen those of local This allows them not only to gain access Mexican partners. to these new consumers, but also to gain loyalty from them.
PwC | Convenience matters – Serving the new Mexican consumer | 31 Authors
David Wijeratne Neu Boon Ling Growth Markets Centre Leader Growth Markets Centre, Manager [email protected] [email protected]
Rafael Barreto Sidharta Sircar Growth Markets Centre, Americas Lead Growth Markets Centre, Assistant Lead [email protected] [email protected]
Acknowledgements
From PwC From the industry • Carlos Navarro, Partner, PwC Mexico • Pablo A. Guzmán Martínez, Director, • Alberto Torrado Martínez, Strategy& PwC Mexico Chairman, ALSEA
• Sergio Meneses, Partner, • José Antonio González, • Federico Tejado, General PwC Mexico Strategy& Senior Manager, International Tax Manager, ALSEA Services, PwC Mexico • Juan Valero, Partner, PwC Mexico • Eduardo Padilla Silva, Chief Strategy& • Javier Rosete, Manager, Advisory Financial and Strategic Development Marketing Manager, PwC Mexico Officer, Fomento Económico • Arturo Martínez M., Lead Partner, Mexicano (FEMSA) Consumer Products, PwC Mexico • Juan José Chávez B., Manager, Corporate Taxes, PwC Mexico • Luis Gerardo Villarreal Rosales, • Juan Manuel Ferrón, Hispanic Chief Operating Officer, Americas Advisory Lead Partner, • Claudio Jiménez, Manager, Grupo FAMSA PwC Mexico Tax, PwC Mexico • Jose F Guerra, Strategic Planning • Mauricio Deutsche Menache, • Carlos Salto, Manager, Director, Coca-Cola México Financial Sector Consulting Lead, Deals Strategy, PwC Mexico PwC Mexico • Ricardo Cortes Izquierdo, • Alfredo Reynoso, Senior Associate, Commercial and Clients’ Leader, • Raúl Lozano G., Advisory Operations Deals Strategy and Readiness, Coca-Cola México and Human Capital Lead, PwC Mexico PwC Mexico • Edgar Torres Garrido, PEMEX Fertilizantes, subsidiary of Petróleos Mexicanos (PEMEX)
• Carlos Rojas Aboumrad, New Business’ Director, Grupo Rotoplas
• Stephen Cartwright, Director, United Kingdom Trade and Investments Mexico
32 | Convenience matters – Serving the new Mexican consumer | PwC Notes and sources
1. Bloomberg business 13. Mexico’s National Institute of 23. Universidad Autónoma de Baja 2. The Economist, ‘The two Statistics and Geography (INEGI) California, Rogelio Varela Llamas, Mexicos’, 2015 14. Forbes, Economic power In Latin Income Differences on Mexico’s Northern Border: A Perspective 3. Reuters: Mexico consumer spending America shifting from Brazil to on Formal and Informal boost seen on new President’s Mexico, 2015 Employment, 2014 reforms, 2013 15. The World Bank Statistics, 24. World Bank, World 4. Bloomberg, Mexico GDP growth 2011-2014 Development Indicators beats forecasts as services sector 16. BBVA Bancomer Foundation, gives boost, 2015 Remittances reached US$24.77 25. FAMSA Information Memorandum 2015 5. Euromonitor, Mexico – It’s all about billion in 2015, 4.8% up on the the middle class, 2015 previous year, 2016 26. PwC Growth Market Centre Series: The Retail and Consumer Industry 6. US Energy Information 17. Forbes, Abercrombie & Fitch ve in Brazil-Navigating the Administration, Energy reform oportunidades en México, 2015 downturn, 2015 could increase Mexico’s long-term 18. PwC, Convenience stores in oil production by 75%, 2014 Mexico, 2015 27. Business Monitor International, Mexico Food & Drink 7. UK Department of Energy and Climate 19. Auto Rental News, Hertz franchisee Report Q4 2015 Change, Mexican energy reform develops opportunities in offers opportunities for UK oil and Mexico, 2008 28. Grupo Éxito corporate website, Grupo Éxito launches its sustainable gas industry – quote from Energy 20. Strategy+business – Big Impact in a commerce initiative: Aliados Minister Matthew Hancock, 2015 Small Format, 2007 Surtimax, 2013 8. The Guardian – Energy reform: will 21. LSE Cities, José Manuel Castillo 29. Eurocash SA, Annual Report, 2014 Mexico’s newest revolution boost Olea, Mexico City: The informal renewables – or just fossil fuels, 2015 economy as a way of life 30. Diageo, Investor webcast – Route to consumer, 2014 9. The Economist, Labour pains, 2012 22. Los salarios del sector formal e 10. Aroq – Just-Drinks.com, Coca-Cola informal en México: análisis de 31. Aroq Just-drinks, Grupo Modelo FEMSA cuts 1,300 jobs as Mexico ganancias y pérdidas por launches digital home delivery, 2015 soda tax bites, 2014 formalización. Jorge O. Moreno 11. The Wall Street Journal, PepsiCo, Treviño, 2007 Nestlé to invest in Mexico, 2014 12. Financial Times, Mexico set for $7bn foreign cash boost, 2014
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