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 www.pwc.com/gmc 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.