Mexico, one of Latin America’s largest economies, is experiencing steady business growth across various verticals, most notably retail. According to Technavio’s analysts, the value of the department store market, which stood at $194.3 billion in 2015, will reach $254.8 billion by 2020, recording a CAGR of 5.57%.
Upon detailed analysis of the Mexican department store market, it is clear that a major share is occupied by the apparel, footwear accessories segment, followed by the consumer electronics & electricals and home furnishing segments, respectively. As Mexico’s middle class is grows at a rapid rate, so do these particular segments of the retail market.
Key drivers of the Mexican department store market
Reduced tariff on imported goods
There was a time when the tariff imposed by the Mexican government on imported goods ranged from 165% to 1000%. Since 2011, the government has revised its tariff band. Currently, the tariff on imported goods stands at 35%, a major reason why many major brands have made their way into the Mexican market. Brands like GAP, H&M, Chico’s, etc. that were previously absent from Mexico have now entered into a partnership agreement with department stores to expand into the country.
Reduced tariffs have also resulted in the growth of Mexico’s private brands, which are now aggressively sourcing products from Asia Pacific countries (APAC).
Growth of retail real estate
In 2014, the retail real estate sector generated approximately $3 billion. Most of the sales came from new buildings, capital improvements, and renovations/upgrades to existing buildings. With the increase in number of shopping malls, the retail space for department stores has also increased. In fact, the growth is so enormous that there is nearly 0% vacancy in shopping malls, especially those located in metropolitan areas.
Growing Middle Class
As previously mentioned, the Mexican middle class, which currently makes up 53% of the population, is the fastest growing segment. Those in the middle class also have disposable income, which makes them a primary target for retail business. The middle class constitutes 50% of the customer base of major department stores in Mexico.
Emergence of store credit cards
Store credit cards offer privileged treatment to those who use them. With the growth of department stores, there has been a rise in the issuance as well as the use of credit cards. In 2015, Grupo Palacio de Hierro and Liverpool generated nearly 50% of their total revenue in Mexico through store credit cards alone. These cards offer customer-friendly deals, interest-free purchases, and easy installment payment options. Further, as most department stores maintain a record of consumer behaviors like store visits, purchase patterns, and shopping frequency, it has become even easier for brands to penetrate the market and target consumers in a highly customized manner.
In addition to the four drivers mentioned, current market trends like celebrity endorsement of certain brands and the growth of e-commerce and social media marketing are also contributing to the expansion of the department store market. Key vendors include Coppel, Liverpool, Sanborns, Grupo Palacio de Hierro and Suburbia, and the competition between them is relatively fierce.
