The E-retail Opportunity in Mexico
Educación Ejecutiva – Internet Retailer
U.S. web retailers looking to expand their global reach have historically overlooked Mexico thanks to the country´s deficient digital infrastructure, combined with its low penetration of credit cards, bureaucratic red tape and a host of concerns about services and security. But Mexican e-commerce has picked up noticeably in recent years, and both Mexican and foreign retailers are responding.
Such U.S. retailers as Wal-Mart Stores Inc., Lowe´s Cos. Inc. and Home Depot Inc. have invested in Mexican e-retail sites in recent months, as has Spain´s Inditex (Industria de Diseño Textil, S.A.), best known for its Zara brand. Amazon.com Inc., which has sold digital products to consumers in Mexico since 2013, is also preparing to soft-launch retail operations in Mexico in February, with the full launch of selling physical goods coming in the second half of 2015. China´s Alibaba Group Holding Ltd., meanwhile, has created an alliance with Latin American marketplace Mercado Libre and is actively looking for a country manager for local expansion. EBay Inc. too is looking for a country manager.
These retailers are investing in a country where online shopping is taking off. Between 2009 and 2013, e-commerce sales in Mexico grew 400%, according to Euromonitor International. And online sales are expected to grow at annual rates between 20% and 35% over the next several years, with Mexico´s direct-to-consumer e-commerce (retail excluding marketplaces and travel) sales expected to double between 2014 and 2018 to $5.5 billion, according to Forrester Research Inc.
This growth is being spurred by more consumers accessing the web. In 2015, 65.1 million Mexicans will go online, making it the eighth-largest Internet user population in the world, according to eMarketer Inc.
Another reason U.S. retailers are looking south is that they know they already have customers ready to buy from them. Experts estimate that as much as 30% of Mexican e-commerce sales are cross-border purchases from U.S. retail web sites. That means many Mexican consumers are already used to buying from U.S. retailers and are familiar with many brands.
Mexico is often compared to Brazil, whose rapid growth in the last quarter century – until the last few years – made it a darling of venture capitalists and multinational companies. Brazil is well ahead in e-commerce, with web sales expected to top $19 billion in 2014, according to Forrester Research, up about 26% from 2013. In addition, Brazil enjoys the presence of several of the world´s largest e-commerce players and its own domestic billion-dollar online retailers, such as B2W Digital Inc. and Cnova.
But there are reasons why foreign retailers should consider Mexico over Brazil:
- Although Mexico is smaller than Brazil (its population is 110 million compared to Brazil´s 192 million), its per capita gross domestic product is 30% greater than Brazil´s. That suggests Mexico´s economy is stronger than Brazil´s
- While bureaucracy and red tape persist in Mexico, it´s worse in Brazil. Mexico ranks No. 39 among 189 economies ranked by ease of doing business, according to the World Bank Group. Brazil is No. 120. (The United States is No. 7.)
- Mexico has an open economy with strong trade agreements with the United States. That makes it much easier to engage in cross-border trade and to repatriate profits generated in Mexico to U.S. accounts.
- Labor and fiscal laws, although strict, are more favorable in Mexico than in many countries, including Brazil.
Brazil is also one of the more developed e-commerce markets globally, a result of a strong entrepreneurial spirit among young Brazilians and large investments from venture capital funds that understood the market´s potential. While Mexico´s e-retail development has lagged, Mexico´s government is taking steps to support the digital economy´s growth through legislative initiatives and by subsidizing companies in the sector. The government recently released the equivalent of $90 million to 26 venture capital funds, which are required to match the same value. That means the digital market will be infused with roughly $180 million.
International investment groups are also looking at the market. Still, domestic retailers´ e-commerce sites generally aren´t as advanced as those of many foreign retailers. And that represents an opportunity
for new competitors to grab market share.
That said, e-retail competition in the Mexican market is picking up, with some serious operations already in place and many more in development. Most of the largest online retailers in Mexico are multi-category retailers like Wal-Mart, Mexican department store chains Liverpool and Palacio de Hierro, and Linio, the Amazon-like online marketplace backed by German e-commerce investment group Rocket Internet. A few specialty retailers have gained scale in recent years, including apparel and shoe stores Netshoes and Dafiti. But there remain only a small number of specialty retailers selling online. For example, in cosmetics, a product category where online sales represents 10% of total sales in several countries, the web accounts for less than 1% of sales in Mexico, according to a study from our firm.
Online marketplaces represent an area of growing competition. Mercado Libre, the Argentine company with online shopping malls throughout Latin America, had the Mexican market to itself for many years. But it now faces fierce competition from Linio and, in a few months, Amazon, Alibaba and eBay. These companies are wooing local and international brands aggressively as they seek to offer the largest variety of products available. While Amazon´s imminent entry poses a threat to incumbents, it could also have a positive impact on Mexican e-commerce by raising consumers´ service level expectations, educating consumers and growing the market´s size.
Meanwhile, Wal-Mart is already established online in Mexico. The mass merchant´s site, Walmart.com.mx, launched same-day delivery last year and offers 30,000 grocery items for same-day delivery. Dave Cheesewright, president and CEO of Wal-Mart International, told investors in a third quarter earnings call that web sales in Mexico grew 66% during the quarter, although he noted that growth was off a small base.
Wal-Mart hired Mexican e-commerce veteran Juan Carlos Garcia, who has launched several startups, in 2012 to run its Mexican e-commerce operation. At the time, the e-commerce team had 10 people. As of September, he said that by the end of 2014 he expected to have 750 people on his team. “The Mexican market is where we were hoping it would get to for the past 15 years”; he says. “The time of great growth is now.”
While most international best practices apply to the Mexican market, he says, foreign companies often have to “tropicalize”; their operations. “Talent with local expertise is critical”; he said. And the competition for top talent is fierce; in fact, Amazon recently hired Garcia as its Mexico country manager.
There are a number of other major brands and retailers, such as L´Oreal Group and Best Buy Co. Inc., that are starting to develop their e-commerce operations or are taking a more serious approach to it. Others expected to be more active online in the next year include Grupo Carso, which includes the largest telecommunication companies in Mexico; U.S. retailers Sears Holdings Corp. and Saks Fifth Avenue; and Mexican department store chain Sanborns. Several other retailers, such as Palacio de Hierro, a high-end department store chain in Mexico, have also been staffing up their e-commerce operations.
This fresh investment from major players may lead to improvements in the sites consumers in Mexico shop today. A survey our consulting firm, LITS ebusiness, conducted among 65,000 Mexican web users point out the weaknesses of e-retail sites today in Mexico – weaknesses that keep Mexican consumers from buying more online and key areas any merchant entering the market should address:
- Lack of product information. Most retail sites display very limited information on the products they sell. Video is basically non-existent, product photos are scarce – often only one per product – and descriptions are poor and not optimized to show up in search engine results. 35% of consumers indicated a lack of information is their main reason for not buying online.
- Poor catalog depth. Some of the largest retailers have less than 10% of their catalog from physical stores available online. 30% of consumers in our survey cited this lack of variety as a reason not to shop online.
- Poor usability. Many Mexican web sites are designed for visual appeal, not conversion. Conversions in Mexico for more mature operations are between 0.5% and 1.5%. Many Mexican sites still ignore analytics, and usability still has a long way to go. Because online shopping is still relatively new for many Mexican consumers, successful e-retail sites have to prioritize educating consumers. For example, mass merchant Liverpool provides videos that explain such very basic e-retail technologies as the shopping cart.
- Payment methods and fraud. Payment is a big challenge because 64% of the population doesn´t have bank accounts, and methods like cash on delivery and payments in convenience stores can represent 40% of an e-retailer´s transactions. However, there are approximately 25 million credit cards in Mexico and 85 million debit cards. Still, only a portion of debit cards – less than 50% in our experience – are accepted online due to bank restrictions. While this is expected to change, merchants wanting to sell to Mexican consumers will need to offer alternative payment formats.
It all adds up to a simple fact: doing business online in Mexico is far from easy. On the other hand, it´s still a largely untapped e-commerce market. And that makes Mexico a big opportunity for companies willing to cross the border.
Coordinador Academico de Educación Ejecutiva
Considerado por la revista Forbes de US como uno de los principales expertos de ecommerce en México. Tiene un MBA por parte de la Darden Graduate School of Business Administration por parte de la Universidad de Virginia, Estados Unidos.
Es socio fundador de la empresa LITS Ebusiness, advisor para varias multinacionales y las principales empresas de México. Fue consultor estratégico en Roland Berger Strategy Consultants en Milán y Madrid, CEO de Digital Luxury.
Actualmente escribe para importantes publicaciones internacionales como Internet Retailer y Jornal de Negocios; desde hace tres años se desempeña como profesor coordinador de comercio electrónico y Marketing digital en el Tecnológico de Monterrey.
Inicia 15 de febrero, Campus Santa Fe. Recibe más información en el siguiente enlace.