Mexico offers intriguing opportunities for American brands looking for new markets

While the U.S. economy is still strong – with low unemployment, rising corporate profits, and low interest rates – at some point the boom will fade and retailers will struggle to sustain growth. Boom times are the perfect time for retailers to consider expanding into foreign consumer markets, especially in Mexico.

American companies have to pick foreign markets carefully. A few years ago, the trend was expanding to so-called BRICS countries, in particular Brazil, Russia, and South Africa. These non-emerging markets all offered opportunities for fast growth from both new money and the promise of government investments in infrastructure. Recent political and economic developments in those countries, however, including unstable currencies and official corruption, have caused retailers to rethink where and when to expand internationally. With the possible exception of India, none of the BRICS countries look very promising in the near future.

Tourism triggers market expansion

Enter Mexico. Over 17 million Mexican travelers visit the U.S. each year, second only to the number of Canadian visitors. Mexicans know and like American brands and when they travel they look for their favorites. This familiarity makes it easier for American retailers and manufacturers of consumer goods to expand into Mexican markets, because they don't have to allocate as many advertising dollars.

Although Mexico and the U.S. have had a complex relationship over the last two decades, trade agreements like NAFTA (to be replaced by the new USMCA) have intensified free trade and migration as well as the influence of each culture on the other. Latino traditions and food have become mainstream in the U.S. Because of media and tourism, Mexicans are more aware of American holidays, food, brands and entertainment. Any U.S. retailer should consider Mexico as their first choice of international expansion.

Why Mexico?

There are key macroeconomic indicators that make Mexico very enticing as an expansion site.

A growing middle class. Mexico was long a country of two economic tiers – the very wealthy and the very poor. The middle class, two-income family demographic was too small to be appealing to the typical U.S. retailer. Now, Mexico has an expanding and educated middle class comprising almost half the country. This middle class is looking for a good retail experience.

In the northern cities, Mexican shoppers are more aware of American brands. It is common to find shopper groups that take monthly bus trips from Mexico to southern Texas, California and Arizona to stock up on merchandise that is unavailable at home or that is perceived as better priced in the U.S.

This growing middle class is moving from large cities to the suburbs. Mexican consumers are looking for options for leisure after work and on the weekends.

Bricks and mortar retail still strong. Though shopping malls have been on a steady decline in the U.S. in recent years as consumers shift to online retail, this is not the case in Mexico. Every year about 40 malls are built in Mexico, some of them averaging more than 1 million square feet. In most cases the new malls are being built on commuter routes between suburbs and cities, giving retailers access to both markets. Older malls are being renovated and expanded. This is very similar to where the U.S. was a few decades ago, at the start of its big retail sales growth.

Mexican high-end department store chains like Palacio de Hierro and Liverpool have been remodeling and expanding their existing malls, and plan to add new ones. Supermarket chains like Chedraui and Comercial Mexicana have similar plans to expand to serve this growing middle class. Carlos Slim, the most successful businessman in Mexico, is committed to creating more mega malls and integrated shopping experiences with entertainment centers that include world-class expo centers, movie theatres, clubs, and museums.

Infrastructure and societal changes

While corruption in Mexico has become more visible, it is not necessarily increasing. The government has become more successful) in reducing the impact of bribes and racketeering. Police and public security organizations continue to improve. The country’s oil industry has been made partially public – unthinkable a decade ago. Even the powerful teachers’ union has been challenged. Social media has played a large part in driving public opinion to force these changes.

Logistics infrastructure has also changed. Ports serving both the Gulf of Mexico and Pacific Ocean have been modernized. Rail freight and intermodal containers have greatly improved, resulting in a huge increase in air freight and commercial travel. Links between ports and internal transportation like railways and highways still need upgrading to avoid chokepoints that slow down the movement of goods.

Although the highway system has been upgraded, it has not kept pace with the increase in the number of passenger cars and trucking. Home delivery remains a challenge in the country’s most remote areas, limiting e-commerce expansion.

Final considerations

Not every American brand will be a good fit in Mexico. Brands that are more local to the North or Midwest, and don't have a presence in Texas or California will find it difficult to gain a foothold in Mexico because of lack of familiarity.

American companies often adapt their product to be more appealing for the Mexican market. For example, McDonald's puts guacamole on their burgers in Mexico. Some familiar brands that have stand-alone stores in the U.S. – like Gap, Aéropostale, and H&M – have gradually expanded into the Mexican market by opening a store-within-a-store in established Mexican retailers like Liverpool.

Don’t let the challenges of Mexico scare you. The growth in Mexico’s middle class definitely offers a sweet spot of opportunity for many retailers today. The ultimate reward may be way more than the risk.

For more information on this topic, or to learn how Baker Tilly specialists can help, contact our team.