BAD DAY FOR MEXICO, AS WAL-MART PUTS OFF EXPANSION PLANS THERE
Byline: Joanna Ramey, with contributions from Rusty Williamson, Dallas and Mark Tosh, New York
WASHINGTON — The future of U.S. retailing in Mexico became a lot cloudier Tuesday, when Wal-Mart announced that its expansion plans there were on hold due to the plummeting peso.
The mass merchant had planned to open 13 Sam’s Clubs and 12 Supercenters during 1995.
Despite the economic turmoil, some retailers said this week that they are nevertheless proceeding with plans for expanding south of the border. Wal-Mart officials were unavailable for comment, but wire reports on Tuesday quoted a spokesperson as saying, “We decided to take our time and monitor the situation until it’s wise to proceed with our plans.” He added Wal-Mart “remains committed to our business plan in Mexico.”
The new development indicates a quick change in plans for the retailer. Only a week ago, Bob L. Martin, president of Wal-Mart International, said at the National Retail Federation’s annual convention that the firm might hold off on the openings of some stores planned for the first quarter of fiscal ’95, but that any delay would be short term and that the chain is “well committed in about 32 cities.” With its joint venture with retailer Cifra SA, Wal-Mart operates about 70 stores in Mexico, including 11 Supercenters and 22 Sam’s Clubs.
Meanwhile, J.C. Penney is plunging ahead. On Monday, its chief executive officer, James Oesterreicher, told WWD that the devaluing peso will not halt the May debut of its first two Mexican stores, in Monterrey and Leon. The openings were originally set for March, but were delayed because of Mexico’s complex country-of-origins import requirements.
“The devaluation of the peso does not have as much of an impact as being able to get goods into the country,” Oesterreicher said. “Local merchants have the same pricing challenge. So many things have happened in Mexico that you have to assume in the long run that it will be a favorable trading partner for us.” And last week, Saks Fifth Avenue ceo Philip Miller said Saks is proceeding with its plans for Mexico, which call for a 163,000-square-foot store in Mexico City in October 1996, as well as clearance centers and catalog distribution. A spokeswoman added Tuesday, “We have not revised our thinking on Mexico,” and she noted Saks executives were there this week working on the expansion.
Kmart previously stated plans to open five more stores in Mexico this year, but officials couldn’t be reached Tuesday. Economists and analysts point out that the financial upheaval that has gripped the country since the peso was devalued in December is bound to retard development of Mexico’s middle class. And development of this consumer segment is the key factor on which much of this retail expansion has been predicated.
“I wouldn’t suggest that anyone rush down there and open 30 stores right now,” declared Peter Palsen, director of Ernst & Young’s North American Business Center earlier this month. “It’s anyone’s guess what’s going to happen.”
“Many if not most retailers are now in a state of shock.” The big question is how soon will Mexico’s economy get back on track and shake off the trauma of 60-75 percent interest rates, flagging consumer confidence and a peso devalued by more than 30 percent. The devaluation came after the government disclosed Mexico’s economic strength was inflated due to several factors, including a massive trade imbalance.
There’s no doubt the Mexican economy will right itself and there will be economic expansion trickling down to boost the middle class and consumer buying, according to Gary Hufbauer, a senior fellow with the Institute for International Economics, Washington.
But he cautioned not to expect the kind of growth that saw South Korea go from poverty worse than Mexico’s to a powerhouse over a 30-year period.
“My guess is that a big factor in the calculations of U.S. retailers has to be that they are able to outcompete the Mexican stores,” Hufbauer said. “U.S stores are good at retail in terms of providing a variety of goods and services. Their growth will have to be based at least in part on taking the market share of their Mexican counterparts away. If they don’t see this as part of their growth, they are banking too much on the growth in the Mexican middle class.”
Currently, the Mexican middle class is estimated to be between 10-15 percent of the country’s population, which is approaching 90 million. The average middle class household is seen as earning $25,000-$35,000, according to calculations made before the country’s currency was devalued a month ago.
In an upbeat prediction, Hufbauer sees the economy snapping back in 1996, with a growth of 4 to 5 percent. Stores, in turn, will benefit from an expected 2-3 percent per-capita income growth, which far exceeds the maximum U.S. income growth of 1.5 percent, he forecast.
However, this is hardly a consensus. Palsen of Ernst & Young said, Dallas, said: “It’s very hard to get a grip on how this is going to shake out. The bullish part of me says that Mexico has taken a stand with concrete actions to address long-term problems, which is better than if they continued to put on the Band-Aids. But there are risks.
Carlos A. Heredia, an economist with the Mexican grassroots development concern, Equipo Pueblo, Mexico City, argued that forecasts, such as those cited by Hufbauer, are greatly overblown. Heredia, an open critic of the current Mexican government, was in Washington two weeks ago to unveil a study done by his organization on redirecting the Mexican economy.
Heredia contended that Mexican President Ernesto Zedillo Ponce de León is doing nothing to address the structural imbalances within Mexico, which has created a massive gulf between the 10-15 percent of the population that is middle class and wealthy elite and the dirt-poor 85-90 percent.
Mexico’s reputation as a burgeoning powerhouse is an “illusion” created by an import-led economy, he said.
Consequently, Heredia sees no potential for increased consumer buying power. Furthermore, he argued, U.S. retailers entering the Mexican market will make serious inroads in domestic retailers’ business.
“You’re looking at a very reduced, small and declining market that doesn’t go beyond the 10-15 percent of the population,” he said. “It is my thought the U.S. retailer investment in Mexico is based on the thought they could grab their share of the market by driving their joint-venture partners out of business and then go it alone.”
Growth among small and medium manufacturers is the key to Mexico’s economic recovery, he said, but government policies for too long have been focused on maintaining foreign investment, which has kept interest rates too high. In addition to working to lower rates, he argued, the government should tax foreign stock market gains and use the proceeds for economic development.
“The duration of the economic problem will probably be in proportion to what the U.S. does as the Big Brother and to what their own government does to shore up the Mexican consumer confidence level,” said Bud Konheim, chief executive officer, Nicole Miller Ltd.
The company has three licensed stores in Mexico, which Konheim said have seen sales dive since the devaluation. Before then, he said, Mexican sales were strong, noting how the two Nicole Miller stores in Mexico City had combined annual sales of $1.8 million, compared with $2 million for its Madison Avenue store in New York.
“I have no way of gauging how long the recovery will take,” Konheim said. “But it won’t be a bad story forever. It will settle down and stabilize.”
“The problem for retailers and developers is that all this happened so suddenly. Everyone was caught off guard,” said Dallas-based shopping mall developer M.G. (Buddy) Herring, who has several projects under way in Mexico. “Everyone is regrouping and trying to determine what this means. All of the issues haven’t been resolved, but they are confident they will all be resolved.”
Two of the knottiest issues to deal with in planning are inflation and interest rates, Herring said. Nevertheless, he has confidence in the government’s projections that the current inflation rate of 20-25 percent should drop to 10 percent by year’s end, which is still above the 6-8 percent precrisis low.
Investment in Mexico will continue, particularly in light of NAFTA, which he said remains a big factor in boosting the size of Mexico’s middle class. “There’s new industry, new business. Those things create new jobs, and those jobs will be for the middle class,” he said.