Mexican Retail Market Holds Good Potential
- What Conclusions Can Be Drawn From Costco’s August Comparable Sales?
- What is Costco’s Fundamental Value Based On Expected 2016 Results?
- By How Much Will Costco’s Revenue & EBITDA Grow In The Next Five Years?
- How Is Costco’s Revenue Composition Trending?
- How Much Is Costco’s Revenue And Gross Profit Expected To Change In The Next Five Years?
- Costco Q3 Earnings : Revenue Increases, EPS Beats Expectations
Historically, Mexico’s retail industry has remained strong as the region has sustained its economic growth and kept inflation under control. What’s promising is that the retail market growth exceeded the country’s GDP growth last year. 
Financing and consumer credits have emerged as important retailing tools in Mexico. Several retailers are evolving into financing bodies by providing the options of deferred payments at a cash price. “Meses sin intereses” or monthly payments with no interest has become a common practice in the market. Moreover, as the competition is rising and consumer demands are increasing, a number of department stores and grocery retailers are expanding their product portfolio. Since Costco already offers a wide variety of products, it is likely to benefit from this trend.
The retailers are also looking to expand throughout the country while specifically targeting the regions with heavy footfall, which has bolstered the popularity of smaller format and quick-stop stores.  This might prove to be a roadblock for Costco’s expansion since its stores are usually large in size (140 k). However, Costco relies less on the convenient location of its store (unlike Wal-Mart Express and Target‘s (NYSE:TGT) CityTarget stores) and more on its business model to attract customers. Moreover, with rising competition a number of Mexican retailers are switch to Internet retailing. In response to this trend, Costco plans to launch an exclusive e-commerce website for Mexico this fall. 
Current State Of Mexican Economy Might Favor Costco’s Growth
Although Mexico’s retail sales have grown in the last few years, they declined unexpectedly during the initial period of 2013.   This is attributable to weak consumer confidence and a slowdown in the overall economy. Mexico’s economy shrank by 0.74% in the second quarter due to lower government spending, weak demand for exports and sluggish consumption. This marked the first decline in the country’s economy in the last four years. 
Mexico’s strong ties with the U.S. economy seem to be preventing it from enjoying strong economic growth that its emerging market peers such as Brazil have.  Due to weakness in the economy, the largest retailer in the region Walmex (Wal-Mart Mexico) witnessed sales declines in consecutive months of July and August. Comparable store sales for other Mexican retailers also fell by 2.3% in July.  However, policy makers are likely to cut the interest rates in order to stabilize the economic growth.  Also, the Mexican government did not include sales tax on essential items such as food and medicine in the latest tax reforms.  This should positively impact the consumer spending on groceries, which will assist Costco’s growth since it earns more than 50% of its revenues from this category. Even the weak economic environment bodes well for Costco’s growth as it serves as a viable shopping destination for buyers looking to save money. This is evident from the fact that Costco’s sales have remained resilient in the U.S. despite the retail market slump arising from cautious consumer spending.Notes:
- Costco’ Q4 fiscal 2013 earnings transcript, Oct 9 2013 [↩] [↩]
- Retailing in Mexico, Euromonitor International, Feb 2013 [↩] [↩]
- Mexico Retail Sales YOY, Trading Economics [↩]
- Mexican Retail Sales Unexpectedly Fall ror Second Month in a Row, Bloomberg, May 22 2013 [↩] [↩]
- Mexico cuts outlook as economy shrinks in first since ’09, Reuters, Aug 20 2013 [↩] [↩]
- Diluted Mexico tax reform gives retailers relief but no panacea, Reuters, Sept 11 2013 [↩] [↩]