RETAILNETGROUP STRATEGY ALERT No.

19 Issue
January 2009
2009 Latin America Outlook Part I: Mexico

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Though the global economic crisis weighed heavily across developed

nations in 2008, its effects haven't yet been felt fully across emerging and
developing economies. Such is the case of many nations in Latin America,
whose GDP growth largely benefited over the last few years from the
worldwide rise of commodity prices. In This Issue
As commodity prices continue to ease through 2009 many Latin American Implications for Latin
America
countries will see their capital inflows significantly constrained. This plus a
global economic slowdown will put Latin America on its slowest growth Mexico Economic Outlook
pace in the last six years (Credit Suisse). New to the RNG Site
Mexico's Retail Outlook
For retailers & CPGs working in Latin America - or looking to expand - this
will fundamentally change the landscape and how to conduct business Winning Segments
in the region. 2009's outlook reflects a challenging external economic Losing Segments
environment whose change is structural more than cyclical in nature. The
good news is that there will be markets, retailers and segments that Parity Segments
will thrive in this challenging environment. Closing Thoughts

Read on for our views on what this changing dynamic means for
Mexico in the first of our series reviewing the 2009 Latin America Outlook.
Store Tours
Aaron Chio, 10,000+ photos -
Senior Analyst Views of the most
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Overall Implications for Latin America the leading Asian
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Latin America has had a longstanding history of vulnerability to external Filter by department -
shocks in the past. Today, there is no doubt the region is structurally Search/sort photos across
different and more resilient than ever before. markets and
retailers by department
Economies in the region that relied on rising commodity prices to fuel (for brand managers
growth over the last 3-4 years (Figure 1) will face a slowdown in domestic looking for
demand as government spending & capital inflows are reduced. In great ideas)
addition, tightening credit markets will limit investments. To adjust,
governments will be faced with the need to depreciate their currencies and "Best Ideas" galleries
weaker exchange rates will be required (Figure 2). that highlight the very
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of our store galleries
Figure 1: Latin America Commodity Prices
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Source: ECLAC, RetailNet Group (click to enlarge) Alerts
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Without a doubt this scenario has the potential to worsen regional innovators, and others
economic growth conditions and will impact retailers that historically relied
on strong top line growth in the region to offset for fluctuations in
exchange rates. In other words, softer sales and weakening exchange
rates could impact historic gains retailers were getting from
markets in Latin America.
Meet Our
For retailers & consumers a regional economic slowdown will
fundamentally impact the retail environment in several different ways,
Analysts
including:
• Shifting - A higher percentage of the addressable shopper base
from each socio-economic strata group (SES) will move
between modern and traditional trade. For example,
shoppers in the "C+" SES might trade down to stores that are
targeted to a "C" SES. Retailers whose retail segments target a
variety of SES stand to weather this change.
• Shrinkage - The modern trade's share of total retail could
be reduced as more people opt out of the modern trade and shift
Dan W. O'Connor is the
some of their consumption back to the traditional trade & closer President & CEO of the
to consumption. This shift is larger in economies whose retail RetailNet Group. He also
markets are less developed and has as much to do with shopper is the Founder of
habits as it does with reduced modern retail investments based Management Ventures,
on the expectation that this change will occur. Inc. (MVI), a WPP Group
company. Dan is a widely
 known industry speaker
• Buying patterns - Not only are consumers likely to shift and thought leader.
between traditional and modern but are also likely to change their LinkedIn | Email
buying patterns. They will chose to trade in/out of the store
and also up/down the shelf, from brands that demand a price
premium to opening price point choices.
These three dynamics will play out differently throughout each market in
Latin America. For now, let's explore Mexico's economic outlook and how
that will translate to the retail marketplace.

Mexico Economic Outlook Aaron Chio is a Senior

Analyst leading RNG's
RNG's subscribers can see our latest stepdown forecasts - from GDP to development of new
chain retail sales, as well as our detailed forecasts for all the segments research, insights and
mentioned in the analysis below by clicking here. Non-subscribers can growth strategies in Latin
request a demo here. America.
LinkedIn | Twitter|
Mexico's heavy dependence on exports to the US - particularly oil - pegs
the Mexican economy's performance closely to that of the US. As Latin
America's largest exporter - USD271 billion in 2007 (69% higher than its
closest rival, Brazil) - Mexico exported 82% of its goods to the US.
The economic slowdown in the US is impacting manufacturing
(automobiles, textiles), immigrant remittances (Figure 3) and discretionary
spend from US citizens (particularly around tourism) going into Mexico.

Figure 3: Remittances hit a 3 year low (USD millions of dollars)

Tim O'Connor is Vice

President at RNG,
currently responsible for
RNG's Growth Strategies
Curriculum and European
market insights.
LinkedIn |

Source: Banxico; RetailNet Group (click to enlarge)

These changing dynamics are expected to impact Mexico's real GDP

growth for 2009, which RNG forecasts will grow between 0.5 to
1%. What does this macroeconomic backdrop tell us about the next 2-3
years for the retail market? Keith Anderson is a
Senior Analyst and
responsible for RNG's
North American research
practice and
transformational
capabilities
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• Understanding the Crisis Report - Key macro conditions Windows Live Messenger
impacting consumers and retailers, in addition to chain retail
forecasts of key winning and losing segments
• Central & South America Market Review - Macro, consumer,
and chain retail overview with a focus on Central America
 • Updated Retailer Sales and Stores data for: Carrefour, select
Auto Retailers, and Latin America
• Retailer presentations from the Morgan Stanley Global
Consumer & Retail Conference - WMT, Shoppers Drug Mart
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Symantha Chow is a
Research Analyst and
supports RNG's North
Retail Outlook American and Latin
American research,
including its database of
Using RNG's chain segmentation model, we divided our Mexico chain chain retailers.
retailer database to highlight the likeliest winners (segments growing 250
basis points above the market average), losers (segments growing 250
basis points below market average), and parity segments (all else who
don't fit the prior definitions) given the current macroeconomic conditions.

RNG's estimated chain retail growth for Mexico 2009E-2011E is

6.5%, down from 10.5% for the 2006-2008E period. Below is a
summary highlighting the sales growth in key segments organized in
RNG's Winner/Loser/Parity segmentation model (Figure 4)

Figure 4: Winner / Loser / Parity / RNG Mexico Chain Retail

CAGRs

Source: RetailNet Group (click to enlarge)

Winning Segments (Figure 5)

Not surprisingly this group is comprised of two growing segments in
emerging/growing markets that can be characterized as cross-over
segments (Figure 6). Cross-over segments are modern retail stores that
are designed and aimed as a way to successfully convert shoppers from
the traditional trade to the modern trade.

Figure 5: Top Mexican Winning Segments

Source: RetailNet Group (click to enlarge)

Figure 6: Cross-over segments have elements of both the
traditional & modern trade

Source: RetailNet Group (click to enlarge)

In Mexico, this is driven primarily by Wal-Mart with its Bodega stores

(Bodega Aurrera and Mi Bodega) under the Cash & Carry segment (not to
be confused with Membership Club, which is a Cash & Carry segment that
requires a membership card to shop the store) and to some extent the
Limited Assortment Grocery segment (driven by the likes of Comercial
Mexicana's Al Precio, Chedraui's Super Che, and Wal-Mart's Bodega
Aurrera Express).

These segments tend to be an entryway early on for retailers in developing

markets as a way to entice shoppers to adopt the modern trade. We can
see this happening throughout most of the developing countries in Central
America.

In addition, cross-over segments also develop later on in the modern trade

development curve (RNG subscribers see the Retail Market Development
curriculum case), albeit in smaller-sized boxes, as retailers begin to
saturate the highly developed cities and start moving either to less
urbanized and populated areas or using these segments as in-fill stores.
Brazil is a good example of this, where Carrefour's Dia stores are
prominent & continue to grow.

Another growing segment is automotive, which is expected to continue to

grow as consumers chose to keep their cars longer in the face of tougher
economic conditions and repair & maintenance becomes necessary.
Lastly, transitional food operators (such as Comercial Mexicana's City
Market) will grow faster than the average mostly due to their relatively
new entry into the marketplace.

Losing Segments (Figure 7)

Losing segments are concentrated in highly discretionary
segments, such as entertainment, furniture, or do-it-yourself (DIY)
segments (Figure 7)

Figure 7: Top Mexican Loser Segments

Source: RetailNet Group (click to enlarge)

Each of these segments encompasses highly competent retailers that are

highly localized and relevant to the market - ranging from companies like
Elektra to Grupo Carso (Sanborns) or CEMEX's Construrama. Their
fundamentals in the longer term are sound, but as consumers
become weary of the economic backdrop RNG expects to see a
reduction in discretionary spending much in line with what we've seen
happening in the US and around the world.

In addition, the core shopper for many of these segments relies heavily on
credit availability. Any credit tightening in the marketplace could have an
impact on the bottom half of consumers who have historically depended on
credit as a way of buying larger ticketed items. The incursion of Wal-Mart
into banking and the continuous focus of other players like Elektra with
Banco Azteca should help offset some of this pressure.

Parity Segments (Figure 8)

Parity segments lie somewhere in between winning and losing segments,
with healthy growth rates that are neither leading nor lagging the rest of
the industry. There is a mix of both discretionary and non-discretionary
segments in here, but the largest one in terms of volume is still biased
towards consumables (Traditional Food).

Figure 8: Top Mexican Parity Segments

Source: RetailNet Group (click to enlarge)

RNG expects most of these segments will see a deceleration in growth

over the next 12-18 months, especially for the relatively smaller segments
that focus on discretionary purchases.
Traditional food growth was hit throughout 2007-2008 by two companies
in particular, Gigante & Comercial Mexicana. However, as their stores are
picked up by better operators we expect to see a better performance over
the next year or two. In addition, inflation has had an important impact on
top line sales performance for individual retailers. An expected
deceleration in food prices for 2009 will impact retailers that rode
the inflation wave to drive sales growth last year, making sales
targets even more challenging in the upcoming year.

Closing Thoughts
The are certain themes arising from our data, analysis, and conversations
with operators, suppliers, and other analysts. Though this list is by no
means exhaustive, it highlights key changes we believe will impact the
marketplace and affect how we do businesses going forward.
• This change appears to be a structural, not cyclical. The
change we are seeing - and what is yet to come - is not cyclical in
nature but rather transformational. Consumers are changing
their consumption habits and they might stay that way longer
than anyone anticipated.
• Non-discretionary will continue to outperform
discretionary segments. For example, while a year ago many
thought of consumer electronics as a key winning category, the
environment today calls for a reevaluation of what it is retailers
are trying to achieve inside their stores as a way to drive traffic.
The majority of retailers outperforming the market appear to be
in non-discretionary segments. This is not a rule, however, and
there are a few exceptions out there.
• Leveraged retailers are at risk. Comercial Mexicana's debt is a
tremendous burden for a company strapped for cash. Soriana's
continuous work with the integration of Gigante requires
resources in a time when they are scarce. Over-leveraged
retailers need cash to pay down debt and any disruptions in cash
flows poise a potential threat to their wellbeing.
• Retailers with multi-segment offerings have greater
changes to outperform. Retailers who utilize a multi-segment
approach will benefit from trading up/down activity in the
marketplace. The challenge with a multi-tier segment offering
becomes as much internal (i.e., vs. its own banners) as it does
external (i.e., vs. competition and the formal trade).
• Excess capacity. The latest ANTAD (National Retail Association
in Mexico) numbers have shown continuous increases in square
footage capacity but no real improvements in organic growth
(comparable or identical store sales growth). This could be a sign
of excess capacity which could lead to a higher number of store
closures/divestitures over the next 12-18 months should this
trend continue.
• Tougher times lead to shorter term decision making,
impacting longer-term performance. Balancing the two
takes discipline, but retailers who execute against their longer
term plan for when markets normalize stand to be in a better
position in the future.
• There are exogenous variables we cannot control.
Government investment in security, infrastructure, education,
public transportation - anything that helps increase affordable
 mobility for people to fill-in jobs where opportunities arise - are of
extreme importance for the development of emerging markets.
These are things retailers and CPGs cannot directly control but
should always be aware of.
For those exploring Latin America, Mexico offers a glance into the region,
and even though each market is markedly different from the next one,
there are traits & commonalities that when understood can hugely impact
the odds of succeeding & becoming a breakaway leader in the
marketplace. Contact us if you would like to learn more about how we
can help you explore these opportunities in detail.

RetailNet Group is the leading insight and advisory firm focused on

retail growth strategies and consumer-facing transformational
capabilities. We are deeply experienced retail/consumer analysts
and strategists working exclusively to help brand-led businesses
and large-scale retailers grow.

Sincerely,

RetailNet Group

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