Beware of the Dog

Someone’s loss is another’s gain.

Just ask Cuidado con el Perro [Beware of the Dog], the rapidly growing Mexican fast-fashion retailer that’s giving Zara and H&M a run for their money, at least in its home country.

The urbanwear chain owned by Mexico’s Kalach textiles group was expected to grow 10 percent in 2019, compared to roughly half that for many of its competitors, which are struggling in the country’s recession.

“They have a really good marketing strategy and design team,” Jorge Quiroga, founder of retail consultancy TodoRetail, told WWD. The retailer’s focus on Mexico’s bargain-seeking Millennial and Gen Z consumers increasingly demanding affordable, Made in Mexico designs has generated huge buzz, he added.

“They are targeting customers who can’t afford Zara, like the twentysomething in his first job without a very good salary who wants to go to a mall and buy a super-fashion T-shirt for 200 pesos, or $11,” said Quiroga.

The firm is spreading across Mexico with a dual strategy of targeting fancy malls and blue-collar neighborhoods with eight to 10 store openings a year, versus on average two to five for rivals such as Zara or department store banner Liverpool and even fewer for premium brands such as Brooks Brothers or Tommy Hilfiger. It also has a growing footprint in the U.S. with units in California and Texas.

Based on average monthly store sales of $15 million (though they can exceed $20 million in flagship locations such as Mexico City’s Oasis Coyoacán mall), Cuidado con el Perro’s annual sales likely exceed $200 million, analysts said.

The Kalach family, said to command 50 percent of Mexico’s textiles manufacturing industry through denim concern Kaltex, owns Cuidado con el Perro as well as affordable suits banner Trajes Milano and another discount apparel retailer, Almacenes García.

As Cuidado con el Perro gains traction, the Kalach family is quickly transforming some of the struggling Almacenes Garcías stores into Cuidado con el Perro units, said Quiroga, adding that the move is paying off. So is the start-up’s use of Kaltex’s factories and its fabrics, which has allowed for a seamless supply chain and enabled the firm to charge low prices for its products,

Quiroga said Cuidado con el Perro’s apparel is similar to that of discounters Suburbia and Waldos, which have also rushed to target shoppers by mixing basic grocery with low-priced apparel. He said the retailer could benefit from a larger catalogue, however, as it markets jeans, shorts and T-shirts as well as children’s wear, but not accessories.

Still, its designs have won Mexicans’ hearts by fusing the latest global trends with patriotic themes. “They have comfortable designs to fit Mexicans [whose body types don’t always match U.S. or European sizes] with bolder and more vivid colors and prints,” said Quiroga.

For example, Cuidado’s latest December catalogue, or “look,” features trendy, unisex black leather jackets, black-and-cheery-colored checked pants, shorts and hoodies, retailing for 80 pesos to 600 pesos. Its e-commerce site also features teenage models wearing T-shirts bearing Mexican folk art symbols such as skulls or “alebrijes” [fantastical creatures] prominent during the country’s celebration of the Day of the Dead.

“There is a new wave of consumers who are demanding authenticity and this is the type of new consumer Cuidado con el Perro is targeting, the ‘I’m a proud Mexican who likes to have my artisan beer and is proud of my country. And don’t tell me anything,'” said Quiroga.

This type of irreverence counters the long-running malinchismo (referring to a love of foreign things) that older Mexicans have long been blamed with clinging to, eschewing local fashion designers. Quiroga said that’s changing, with younger consumers embracing Mexican talent, as witnessed by department store El Palacio de Hierro’s growing local designers’ wing, coupled with the emergence of new Cuidado con el Perro rivals such as Ay Guey [Oh Dude].

So where did a brand name evoking an aggressive dog stem from?

Quiroga said one of the young Kalachs, whom he declined to name, wanted to start a fast-fashion chain to boost the family’s retail arm and take on the Inditex-owned Zara or Bershka, which have expanded rapidly in Mexico.

Other analysts said the name of the Kalach member who started the company is shrouded in mystery, especially since the family keeps a notoriously low profile. During the high-level talks to renegotiate NAFTA, now called USMCA, Moises and Alberto Kalach were influential members of the Mexican team alongside chief negotiator Jesus Seade. Few, however, were aware of their involvement.

“This family’s money is all mixed up in a blender,” added Quiroga. “They are all owners of the business. The patriarch is Moises but there are many nephews like Abraham, Federico, Jacobo, Samuel, Tony…like 27 of them. So it’s a mystery who started Cuidado con el Perro.”

A quick search on LinkedIn, however, revealed family member Alberto Kalach as having served as Cuidado con el Perro’s chief executive officer between 2007 and 2011, around the time the label began expanding after opening its first store in Toluca, an industrial town outside Mexico City that’s also home to Kalach-owned mills. Alberto Kalach, who lists himself as brand manager of Almacenes García, did not return messages to find out if he started the company.

As Cuidado thrives, other Mexican fashion purveyors are struggling as consumers tighten their belts amid economic stagnation, hurting premium and luxury brands.

Clothing sales are expected to register growth of 5 to 6 percent on a same-store basis in 2019, down from a 13 percent hike the previous year, Quiroga said, citing statistics from researcher Trendex. Overall, however, he expected turnover to decline around 50 percent for department stores. The exception is El Palacio de Hierro, which he forecast to grow 5 to 6 percent in 2019, countering views that the retailer is resorting to “desperate” sales campaigns as nervous shoppers shun high-end products.

Quiroga conceded, however, that foreign labels considered premium in Mexico, such as Calvin Klein, Lacoste or Tommy Hilfiger, are having a hard time as people downgrade to lower-priced goods. Even Cuidado con el Perro’s forecast 10 percent sales gain in 2019 is down from a 17 percent increase in the prior year.

Valentin Mendoza, a director at Banorte research, added the country’s other retail giant, Liverpool, is also witnessing a slowdown.

“We have seen diminished growth as consumers have turned more cautious for products in their clothing division, though the trend is not yet negative,” he said.

Liverpool’s commercial division including apparel and other consumer staples sold in its eponymous and other banners Fabricas de Francia and Suburbia will grow 6.1 percent in 2019, versus 11 percent in 2018, according to Mendoza.

He said Suburbia saw a 5.9 percent drop in same-store sales in the third quarter, hurt by Liverpool’s strategy to merge ailing Fabricas de Francia into its chain. Liverpool has also reported issues from problems to integrate Suburbia, which it snapped up from Walmart Inc. in 2016.

Designer brands are also suffering.

Carlota de la Vega, owner of knitwear brand Camomilla, said boutique orders for her high-end products have slumped in key locales such as luxury hotel St. Regis or Marriott in Mexico City. Mexican designers including Alexia Ulibarri and Pineda Covalín have also curtailed orders, she added.

“It has been a difficult year and not just for fashion but for all sectors that are seeing production declines, because of the change of government [new President Andrés Manuel López Obrador] and so much uncertainty. People are just not spending like they were,” she said.

De la Vega agreed Cuidado con el Perro is an exception.

“They are all in, stronger and stronger every day with strategic locations and very innovative collections with vivid colors and good prices,” she concluded.