Doing business in Mexico

AgExporter, August, 1994 by Marvin Lehrer

Mexico is a market of tremendous potential, but doing business there requires patience and knowledge of Mexican social customs and business etiquette.

U.S. food companies can sell either directly to a Mexican customer or indirectly through a broker, distributor or agent. Each method offers advantages and disadvantages. Your company's size, resources and expected export volume will determine the best approach.

Direct: Only a small volume of U.S. exports moves this way as most Mexican retailers and food service companies are not set up to import directly. Selling directly requires a great deal of effort and would probably make sense only if a company has a limited number of potential customers.

Broker: Most U.S. products are sold through U.S. or Mexican brokers based in the United States, normally with offices located in the major border cities such as Laredo, McAllen and El Paso, Texas; Nogales, Arizona; and San Diego, California. Other important Mexican-U.S. brokering locations are San Antonio, Houston, Los Angeles and, to a limited extent, Chicago. Products moving to the Caribbean beach resorts are normally brokered out of Miami and U.S. cities along the Gulf of Mexico.

Using a broker is probably the easiest sales method but offers the fewest rewards. The U.S. supplier does not need to worry about logistics and red tape, and payment is ordinarily handled like any other domestic transaction with all the customary legal protection. However, the U.S. company has no control over where the product ends up or its arrival condition and it is difficult to build a brand identity.

Distributor: For small and medium U.S. food companies, it is probably best to tap into an existing distribution network -- either that of a distribution company or a Mexican food processor. U.S. companies should benefit from higher margins at the should benefit from higher margins at the expense of considerable time supervising distributor(s) and some payment risk. The difficulty is the shortage of good distributors.

The support you will need to provide the distributor will vary depending on the contractual terms you work out. For instance, you may agree to provide funding for advertising and promotional support or you may consider extending payment terms to match the terms the distributor must provide its Mexican customers.

Agent: Another option is to sell through a Mexican-based agent. The investment in time and effort is great but the rewards are larger as well. This route makes sense if you have a significant export volume or an extensive product range.

It is probably best to contract with a company rather than hire an individual to represent your firm. Mexican labor laws make it difficult and expensive to dismiss an individual.

Finding a Distributor

Finding a distributor is not easy. And because they are limited in geographic coverage, a company may need several distributors to cover all of the major markets in Mexico.

The U.S. Agricultural Trade Office can usually provide you with a list of distributors. Also check with U.S. companies already distributing their product in Mexico for recommendations. You cannot check on credit ratings the way you can in the United States. Therefore, you should: -- Inspect warehouse facilities and delivery capabilities to make sure that they are able to meet the special requirements for delivering your products. -- Check references with companies the distributor already represents. -- Ask the retailers or food service outlets to which they distribute about their reliability and timeliness.

Most distributors will ask for an exclusive to represent your products for the whole country; however, few can deliver on this. Most distributors need to sell to sub-distributors in other parts of the country. This will result in additional markups, raising prices unnecessarily. Though cumbersome, it is best to have distributors in each of the key regions of the country.

Getting Paid

U.S. companies should sell only on the basis of cash or an irrevocable letter of credit when doing business in Mexico for the first time. As you develop rapport with your customers and they build a good payment track record, you may decide to move to a less rigid form of payment.

Due to high commercial interest rates in Mexico (as high as 30 percent in some instances), maintaining inventories can be costly. Therefore, payment terms can significantly affect company profits and also dictate the schedule by which your distributor will want to pay you. For instance, terms are a minimum 45-60 days for the major supermarket chains.

Promoting Your Product

Mexican consumers are greatly influenced by promotion and advertising, but personal contact is also important. While billboards, radio, and television are very popular, in-store promotions, handouts, recipe cards, and other forms of direct merchandising are important promotional tools, especially for new-to-market products.

U.S. exporters should support their importers and distributors with promotional campaigns, especially during the introduction phase.