A new growth opportunity? - Wal-Mart Stores Inc. may enter Mexican market

Discount Store News, June 17, 1991 by MAry Ellen Kelly

A New Growth Opportunity?

MONTERREY, Mexico - A few months ago, a plane landed here carrying key Wal-Mart executives. The retailers, according to confidential sources, spoke with management at some of the country's leading discount and hypermarket chains. Some sources said they met with Gijante or Aurrera, while others said the talks were with Commercial Mexicana (which recently filed an initial public offering), or publicly held Cifra.

After a tour of the market, the Wal-Mart team shook hands with the Mexican businessmen, boarded their plane and went back to Bentonville. That brief visit was like an earthquake, sending tremors through the Mexican business community and across the U.S. border.

The field trip, which Wal-Mart refused to comment on, helped fuel speculation that the U.S. retailer had purchased a portion of stock in a Mexican discount store chain. Although a Wal-Mart spokesman told DSN the chain has not made such a purchase, analysts, consultants, vendors, Mexican press and retailers still believe that there must be some element of truth to the persistent speculation.

One analyst summed up the sentiments of much of the industry when he said, "The rumors regarding Wal-Mart in Mexico are widespread in the industry these days . . . They have been so persistent I would find it hard to believe that there's no truth in them."

Regardless of what Wal-Mart is or is not doing south of the U.S. border, retailers like Sears and Woolworth have been cultivating what is expected to become an explosive market in the years ahead.

Retailers who have stores anywhere near the Mexican border have been aware of the sales potential of the Mexican market by the high volume of cross-border shopping. McDonald's, Domino's Pizza, Subway and Arby's have already established a presence in the Mexican market - and where mass market food goes, mass market retailing can't be too far behind.

U.S. manufacturers are also alert to the growing vitality of the Mexican economy. When asked about sales to stores in Mexico, many flash a Cheshire cat smile and say, "Oh, it's all right." Then, more seriously ask, "What have other manufacturers been telling you?" Many vendors have found Mexicans hungry for U.S. goods, but are trying to downplay the potential of this up and coming market, at least when it comes to letting their competitors know how well they're doing.

Kevin Sauder, director of marketing with ready-to-assemble furniture manufacturer, Sauder Wood-working, Archbold, Ohio, said his company is doing well in Mexico and has already completed assembly instructions in Spanish for its RTA furniture.

"We've made significant inroads into that market during the past couple years," he said. "All of international is growing quite rapidly. In fact, we've probably doubled our international sales each year for the past four years."

Tom Corbo, vice president, marketing with Manco, Westlake, Ohio, recently returned from an exploration of the Mexican economy.

"I don't know if everyone belongs in Mexico, but I know we do," Corbo said. "If U.S. retailers move down there, they will want a vendor that can act as a consultant on their team, teaching them what they've learned about the market."

Manco product is on shelves at Ace Hardware stores in Mexico and other outlets, and is expected to be stocked at some of the Mexican hypermarkets in the very near future.

Other U.S. manufacturers with product on the shelves of Mexican stores include Rubbermaid, Mead, W.T. Rogers, and Sherwin Williams (which operates a plant in Mexico).

The interest in the Mexican market is expected to become apparent by attendance levels at an upcoming Deloitte & Touche conference on the "Retailing Road to Mexico" on June 20 near the Dallas-based consulting group's headquarters. Speakers will include the Consul Generals of Canada and of Mexico; Joseph Haggar Jr., chairman of the board of Haggar Apparel, experts on Mexico from co-sponsors Deloitte & Touche and the University of North Texas.

The Mexican economy right now is a very concentrated market with roughly one-third of the population centered in the four major cities: Mexico City, D.F.; Guadalajara, Monterrey and Puebla (in that order of population). The minimum wage in 1991 is roughly $130 per month, according to research gathered by Manco's Mexican rep agency, Comercializadora ZAE. Other data reveals a population base very unlike the United States; 63% under 24 years of age.

Favorable currency rates and low cost labor have lured some manufacturers to move production to Mexico; having done so, their eyes have been opened to retail opportunities, especially with free trade with Mexico expected in the near future. The gradual flow of production into Mexico, in turn, is expected to spawn a blue collar worker class that seeks a place to spend its new income.

There are barriers to entry, especially until Free Trade becomes a reality - and most Mexican economy specialists say it will happen - but the question is whether it will take one year or two.